[Federal Register Volume 73, Number 243 (Wednesday, December 17, 2008)]
[Rules and Regulations]
[Pages 76697-76791]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-29151]



[[Page 76697]]

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Part II





Department of Agriculture





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Rural Utilities Service



Rural Housing Service



Rural Business-Cooperative Service



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7 CFR Parts 1779, 3575, 4279 et al.



Rural Development Guaranteed Loans; Interim Rule

Federal Register / Vol. 73, No. 243 / Wednesday, December 17, 2008 / 
Rules and Regulations

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DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1779

Rural Housing Service

7 CFR Part 3575

Rural Business-Cooperative Service

Rural Utilities Service

7 CFR Parts 4279 and 4280

Rural Business-Cooperative Service

Rural Housing Service

Rural Utilities Service

7 CFR Part 5001

RIN 0570-AA65


Rural Development Guaranteed Loans

AGENCIES: Rural Business-Cooperative Service, Rural Housing Service, 
Rural Utilities Service, USDA.

ACTION: Interim rule with request for comments.

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SUMMARY: This interim rule establishes a unified guaranteed loan 
platform for the enhanced delivery of four existing Rural Development 
guaranteed loan programs--Community Facility; Water and Waste Disposal; 
Business and Industry; and Renewable Energy Systems and Energy 
Efficiency Improvement Projects. This interim rule eliminates the 
existing loan guarantee regulations for these four programs and 
consolidates them under a new, single part. In addition to 
consolidating these four programs, this interim rule incorporates 
provisions that will enable the Agency to better manage the risk 
associated with making and servicing guaranteed loans and that will 
reduce the cost of operating the guaranteed loan programs.

DATES: This interim rule is effective January 16, 2009. Comments must 
be received on or before February 17, 2009.

ADDRESSES: You may submit comments to this rule by any of the following 
methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Submit written comments via the U.S. Postal Service 
to the Branch Chief, Regulations and Paperwork Management Branch, U.S. 
Department of Agriculture, STOP 0742, 1400 Independence Avenue, SW., 
Washington, DC 20250-0742.
     Hand Delivery/Courier: Submit written comments via Federal 
Express Mail or other courier service requiring a street address to the 
Branch Chief, Regulations and Paperwork Management Branch, U.S. 
Department of Agriculture, 300 7th Street, SW., 7th Floor, Washington, 
DC 20024.
    All written comments will be available for public inspection during 
regular work hours at the 300 7th Street, SW., 7th Floor address listed 
above.

FOR FURTHER INFORMATION CONTACT: Mr. Michael Foore, Rural Development, 
Business and Cooperative Programs, U.S. Department of Agriculture, 1400 
Independence Avenue, SW., Stop 3201, Washington, DC 20250-3201; e-mail: 
[email protected]; telephone (202) 690-4730.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This interim rule has been determined to be significant and was 
reviewed by the Office of Management and Budget in conformance with 
Executive Order 12866. The Agency conducted a qualitative benefit cost 
analysis to fulfill the requirements of Executive Order 12866. Based on 
the results of this qualitative analysis of the benefits and costs of 
the interim rule, the Agency has concluded that the net effect of the 
rule will be beneficial in part due to improved underwriting. Copies of 
the benefit cost analysis may be obtained from Cheryl Thompson, 
Regulations and Paperwork Management Branch, Support Services Division, 
U.S. Department of Agriculture, Rural Development, STOP 0742, 1400 
Independence Ave., SW., Washington, DC 20250-0742 or by calling (202) 
692-0043.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) of 
Public Law 104-4 establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on State, local, and 
tribal governments and the private sector. Under section 202 of the 
UMRA, Rural Development generally must prepare a written statement, 
including a cost-benefit analysis, for proposed and final rules with 
``Federal mandates'' that may result in expenditures to State, local, 
or tribal governments, in the aggregate, or to the private sector of 
$100 million or more in any one year. When such a statement is needed 
for a rule, section 205 of UMRA generally requires Rural Development to 
identify and consider a reasonable number of regulatory alternatives 
and adopt the least costly, more cost-effective, or least burdensome 
alternative that achieves the objectives of the rule. This interim rule 
contains no Federal mandates (under the regulatory provisions of Title 
II of the UMRA) for State, local, and tribal governments or the private 
sector. Thus, this rule is not subject to the requirements of sections 
202 and 205 of the UMRA.

Environmental Impact Statement

    This document has been reviewed in accordance with 7 CFR part 1940, 
subpart G, ``Environmental Program.'' Rural Development has determined 
that this action does not constitute a major Federal action 
significantly affecting the quality of the human environment, and in 
accordance with the National Environmental Policy Act (NEPA) of 1969, 
42 U.S.C. 4321 et seq., an Environmental Impact Statement is not 
required. Loan applications will be reviewed individually to determine 
compliance with NEPA.

Executive Order 12988, Civil Justice Reform

    This interim rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. In accordance with this rule:
    (1) All State and local laws and regulations that are in conflict 
with this rule will be preempted;
    (2) No retroactive effect will be given this rule; and
    (3) Administrative proceedings in accordance with the regulations 
of the Department of Agriculture National Appeals Division (7 CFR part 
11) must be exhausted before bringing suit in court challenging action 
taken under this rule unless those regulations specifically allow 
bringing suit at an earlier time.

Executive Order 13132, Federalism

    It has been determined, under Executive Order 13132, Federalism, 
that this interim rule does not have sufficient federalism implications 
to warrant the preparation of a Federal Assessment. The provisions 
contained in the interim rule will not have a substantial direct effect 
on States or their political subdivisions or on the distribution of 
power and responsibilities among the various government levels.

Regulatory Flexibility Act

    This interim rule has been reviewed with regard to the requirements 
of the Regulatory Flexibility Act (5 U.S.C. 601-612). Rural Development 
has determined that this rule will not have a significant economic 
impact on a substantial number of small entities.

[[Page 76699]]

Rural Development made this determination based on the fact that this 
regulation only impacts those who choose to participate in the program. 
Small entity applicants will not be impacted to a greater extent than 
large entity applicants.

Executive Order 12372, Intergovernmental Review of Federal Programs

    Rural Development Guaranteed Loans are subject to the Provisions of 
Executive Order 12372, which require intergovernmental consultation 
with State and local officials. Rural Development conducts 
intergovernmental consultation in the manner delineated in RD 
Instruction 1940-J, ``Intergovernmental Review of Rural Development 
Programs and Activities,'' available in any Rural Development office, 
on the Internet at http://rurdev.usda.gov.regs, and in 7 CFR part 3015, 
subpart V.

Executive Order 13175, Consultation and Coordination With Indian Tribal 
Governments

    This executive order imposes requirements on Rural Development in 
the development of regulatory policies that have tribal implications or 
preempt tribal laws. Rural Development has determined that the interim 
rule does not have a substantial direct effect on one or more Indian 
tribe(s) or on either the relationship or the distribution of powers 
and responsibilities between the Federal Government and the Indian 
tribes. Thus, this interim rule is not subject to the requirements of 
Executive Order 13175.

Programs Affected

    The Catalog of Federal Domestic Assistance Program numbers assigned 
to this program are: 10.760, Water and Waste Disposal Systems for Rural 
Communities; 10.766, Community Facilities Loans and Grants; 10.768, 
Business and Industry Loans; and 10.775, Renewable Energy Systems and 
Energy Efficiency Improvements Program.

Paperwork Reduction Act

    Pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 
35; see 5 CFR part 1320), the information collection provisions 
associated with this interim rule have been submitted to the Office of 
Management and Budget (OMB) for approval as a new collection and 
assigned OMB number 0570-0054. In the publication of the proposed rule 
on September 14, 2007, the Agency solicited comments on the estimated 
burden. The Agency received one public comment letter in response to 
this solicitation. This information collection requirement will not 
become effective until approved by OMB. Upon approval of this 
information collection, the Agency will publish a notice in the Federal 
Register.
    Title: Rural Development Guaranteed Loans.
    OMB Number: 0570-0054 (assigned)
    Type of Request: New collection.
    Expiration Date: Three years from the date of approval.
    Abstract: The majority of information being collected is associated 
with lender applications and its associated requirements for lender 
entities seeking to participate in the program and with loan guarantee 
applications. The types of information collected for lender 
applications include, but is not limited to, basic data about the 
lending entity and a summary of the lending entity's loan origination 
and servicing policies and procedures as well as, as applicable, its 
lending history and experience and its relationship with its regulator.
    The type of information collected with the guarantee application 
depends on whether it is being submitted by an approved lender or a 
preferred lender. Approved lender guarantee applications require more 
information to be submitted than a guarantee application from a 
preferred lender. Guarantee applications from approved lenders must 
contain the lender's analysis and credit evaluation, environmental 
information, technical reports, energy audits or assessments, 
appraisals if available, business plan, feasibility study, credit 
reports, and financial statements. An Affirmative Fair Housing 
Marketing Plan is required where applicable.
    Guarantee applications from preferred lenders must contain 
information sufficient for the Agency to confirm project and borrower 
eligibility, a copy of the lender's loan evaluation and analysis, 
internal loan approval documents, and environmental information.
    Information is also collected when the loan is being approved 
(e.g., conditional commitment, lender's agreement). Once the loan is in 
place, information is collected during the servicing of the loan. For 
example, loan status reports, including information on loans that are 
in default, and borrower financial reports are provided to the Agency 
by the lender. Additional information is collected when changes occur 
during the life of the loan (e.g., mergers, subordinations, transfers 
and assumption).
    The estimated information collection burden has increased by 
approximately $357,500, from $2,933,520 estimated for the proposed rule 
to $3,290,998 estimated for the interim rule. The majority of this 
increase is attributable to two changes. One change is the addition of 
the requirement for other lending entities (i.e., those that are not 
regulated or supervised) to undergo an examination acceptable to the 
Agency in order to participate in the program. This change, made in 
response to public comment, will help the Agency manage institutional 
risk. The second change is the removal of the low documentation 
application for guarantee. This was also eliminated in response to 
public comment and further helps the Agency manage institutional risk 
by requiring approved lenders to submit more information on each 
guaranteed loan requested. Together, these two changes account for 
approximately 90 percent of the increase in costs.
    Other changes are accounted for by such changes as requiring 
additional notifications (e.g., loan classifications, changes in a 
lender's policies and procedures), additional guarantee application 
requirements (for Community Facility and Water and Waste Disposal 
guaranteed loans), and submittal of borrower financial reports. These 
changes further help the Agency mitigate the risk associated with the 
guaranteed loans it approves.

E-Government Act Compliance

    Rural Development is committed to complying with the E-Government 
Act, to promote the use of the Internet and other information 
technologies to provide increased opportunities for citizen access to 
Government information and services, and for other purposes.

I. Overview

    This interim rule implements a unified guaranteed loan platform for 
the delivery of four guaranteed loan programs. The guaranteed loan 
programs included in the interim rule are Community Facilities, Water 
and Waste Disposal Facilities, Business and Industry, and the Rural 
Energy for America Program (previously known as the Renewable Energy 
System and Energy Efficiency Improvements program). Provisions common 
to each of the four programs are found in subpart A of the rule. 
Provisions specific to an individual program are found in subpart B of 
the rule. The unified guaranteed loan platform will allow USDA Rural 
Development to simplify, improve, and enhance the delivery of these 
four guaranteed loan programs across their service areas.

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II. Background

    By statutory authority, USDA Rural Development is the leading 
Federal advocate for rural America, administering a multitude of 
programs, ranging from housing and community facilities to 
infrastructure and business development. Its mission is to increase 
economic opportunity and improve the quality of life in rural 
communities by providing the leadership, infrastructure, venture 
capital, and technical support that enables rural communities to 
prosper and adapt to new technologies, products, and markets.
    To achieve its mission, USDA Rural Development provides financial 
support (including direct loans, grants, and loan guarantees) and 
technical assistance to help enhance the quality of life and provide 
the foundation for economic development in rural areas. USDA Rural 
Development has used the four guaranteed loan programs included in this 
interim rule, as well as other guaranteed loan programs, to achieve 
Rural Development's mission. The regulations that are being combined 
under the interim rule have developed over time and, in some aspects, 
independently of each other. Issues have developed when looking at all 
four program regulations as a whole as well as individually. This was 
stated in the proposed rule published on September 14, 2007, Federal 
Register (72 FR 52618). The four issue areas identified by Rural 
Development are:
    Inefficiencies. Many of the same lenders and, in some cases, 
borrowers, seek loan guarantees under more than one of these four 
programs. Thus, the same entities are required to learn multiple 
programs. This is inefficient and costly to the lenders and makes the 
programs less attractive to lenders. Currently, when new programs are 
implemented, a whole new regulation is developed that, in many 
respects, addresses or adopts many of the same requirements. Time and 
effort are wasted in readdressing issues during the development of new 
program regulations leading to inefficient rulemaking and a delay in 
program implementation.
    Inflexibility. Maintaining four separate sets of basic requirements 
creates certain inflexibilities. For example, with each program 
administered under separate regulations, any change to basic 
requirements calls for multiple concurrences. Similarly, adding a new 
program requires the addition of a new set of basic requirements, as 
these are not currently shared.
    Use of Agency Resources. Agency personnel spend a large amount of 
time performing process-related tasks that are not necessarily 
productive in making loan guarantees available to more lenders and, in 
turn, to more borrowers. These tasks are often inefficient and could be 
better managed by the private sector at the lender level. Further, 
these tasks are applied equally regardless of the relative level of 
risk of the associated loans. In sum, the current delivery of these 
four programs is not making the best use of Agency resources.
    Risk Management. In making and managing a portfolio of loan 
guarantees, consideration must be given to project risk, institutional 
risk, Agency loss exposure, and internal operational risk.
    Project risk refers to the ability of a project to repay its debt. 
The current process relies on the lender's evaluation of the project 
and then the Agency's review of the lender's analysis. The types of 
information required to be assessed under each of the programs by the 
lender may vary. Currently, the Agency lacks definitive parameters to 
evaluate project risk and is inconsistent in its evaluation of risk 
across State Offices. The lack of definitive parameters might create 
more risk. It allows projects to be funded based on completed processes 
as opposed to set evaluation criteria. This can result in funding more 
risky projects that may come at the expense of less risky projects over 
time because of limited program funds.
    Institutional risk refers to the quality of the lender seeking the 
loan guarantee. Some lenders simply do a better job at managing their 
portfolios and thereby have a lower rate of defaults. The current 
system does little to pre-qualify lenders; that is, the criteria for a 
lender to originate a loan with the Agency are insufficient.
    Agency loss exposure refers to the Agency's risk for potential loss 
in any one project in terms of the percent of guarantee and the size of 
the loan. Currently, Agency loss exposure is managed by putting limits 
on the percent of guarantee relative to the size of the loan, by having 
collateral requirements, and, for some of the programs, by limiting the 
size of the loan. While these limits are the primary mechanism for 
managing Agency loss exposure, the current programs could do more to 
manage this risk.
    Agency operational risk refers to internal weaknesses inherent in 
administering multiple programs using a variety of regulations that 
require unique sets of processes and procedures.
    Rural Development is addressing the issues associated with these 
four guaranteed loan programs through this unified guaranteed loan 
platform. This platform addresses the inefficiencies in maintaining 
separate regulations, better manages the risks associated with their 
delivery, significantly reduces inconsistencies in the implementation 
of these four programs across State offices, improves underwriting for 
loan guarantees, and reduces operational risk. By implementing a 
defined set of criteria to assess lender performance, Rural Development 
improves its management of lenders participating in these programs.

III. Discussion of the Interim Rule

    USDA Rural Development is issuing this regulation as an interim 
rule, with an effective date January 16, 2009. All provisions of this 
regulation are adopted on an interim final basis, are subject to a 60-
day comment period, and will remain in effect until the Agency adopts a 
final rule.

IV. Changes to the Rule

    This section presents changes to the proposed rule. Most of the 
changes were the result of the Agency's consideration of public 
comments to the proposed rule. Some changes, however, are being made in 
response to the provisions of the 2008 Farm Bill. The changes to the 
proposed rule are presented by section. Unless otherwise indicated, 
rule citations refer to those in the interim rule.
Highlighted Changes
    There were several portions of the rule that drew numerous 
comments. The following list highlights some of the changes made to the 
rule. These changes are also presented in the section specific change 
portion that follows this list.
     Cash equity as a minimum financial criterion has been 
replaced with a debt-to-tangible net worth ratio criterion.
     Low application documentation provisions have been 
deleted.
     Preferred lender status now applies only to the Business 
and Industry program and the requirements for becoming a preferred 
lender have changed. The Agency may administratively allow other 
programs to have preferred lender status at some date in the future 
and, in this event, would publish a Federal Register Notice to this 
effect.
     The requirement that a lender comply with either its 
lending policies and procedures or those in the rule, whichever is more 
stringent, has been modified by the addition of the phrase

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``unless otherwise approved by the Agency.''
     Lenders are not required to submit copies of their 
policies and procedures, but are instead to submit a written summary of 
their policies and procedures when submitting an application.
     The proposed provision that ``The guaranteed portion will 
be paid first and given preference and priority over the unguaranteed 
portion'' has been replaced with ``the unguaranteed portion of the loan 
will neither be paid first nor given any preference or priority over 
the guaranteed portion.''

Section Specific Changes

Subpart A--General Provisions

Purpose and Scope (Sec.  5001.1)
    This section has been revised in two ways.
    First. Paragraph (a) of this section adds that the provisions of 
this part apply only to those guaranteed loan programs that are 
included in subpart B. This clarifies the scope of the part.
    Second. The Agency added paragraph (b) to clarify the relationship 
between the provisions in subpart A and those in subpart B. By 
including this paragraph, the Agency was able to remove from the rest 
of the rule such clauses as ``unless otherwise specified in subpart 
B.''
Definitions (Sec.  5001.2)
    The Agency made numerous changes to the definitions section of the 
rule, including redefining certain terms, adding new definitions, and 
deleting several definitions. The following identify each affected 
term.
    Applicant. This definition was deleted.
    Approved lender. This definition was added to clarify 
responsibilities.
    Borrower. This definition was redefined, in two ways, in order to 
clarify who constitutes a borrower and to identify in the rule which 
requirements apply to the borrower or to the lender or to both.
    First. The word ``entity'' was replaced with ``person'' and the 
phrase ``or seeks to borrow'' was added after ``The person that 
borrows.''
    Second. The definition for ``person'' was added.
    Business plan. This definition was clarified by replacing the word 
``applicant'' with ``borrower.''
    Conditional commitment. The Agency added ``of commitment'' after 
``The Agency-approved form'' and replaced ``it'' with ``the lender.''
    Conflicts of interest. This definition was removed. The Agency has 
made revisions elsewhere in the rule such that the Agency does not 
believe that this term needs to be defined in the rule. Instead, the 
Agency will provide guidance on this term in the handbook to the rule.
    Cooperative organization. This definition was expanded to include 
``any entity that is legally chartered as a cooperative.'' This was 
done to correct an oversight in the proposed rule that would have 
excluded ``true'' cooperatives.
    Day. This definition was added for clarity.
    Debt coverage ratio. This definition was revised in response to 
comments to make the term more in keeping with normal banking practice.
    Essential community facility. This definition was redefined in 
three ways:
    First. At the beginning of the definition, the Agency added 
``(including machinery, and/or equipment)'' after ``The physical 
structure'' and before ``financed'' to help illustrate what physical 
structure includes.
    Second. The sentence ``Not include a project that benefits a single 
individual or group of single individuals as opposed to a class within 
a community'' was replaced with ``Benefit the community at large.'' The 
Agency believes that this change better identifies the Agency's intent. 
(paragraph (3))
    Third. The phrase ``Be located in a rural area'' was removed. The 
Agency moved this phrase to subpart B for the Community Facilities 
program, where the Agency believes it is more appropriate.
    Existing businesses. The second sentence of this definition has 
been rewritten to further define certain types of changes that 
constitute existing businesses.
    Feasibility study. This definition was revised to state that the 
analysis is ``by a qualified consultant.''
    High impact business. Significant revisions to this definition 
clarify what businesses constitute a ``high impact'' business.
    Immediate family. This definition adds reference to ``or 
adoption,'' to individuals living within the same household, and to 
domestic partners. The definition now reads ``Individuals who are 
closely related by blood, marriage, or adoption, or live within the 
same household, such as a spouse, domestic partner, parent, child, 
brother, sister, aunt, uncle, grandparent, grandchild, niece, or 
nephew.''
    Lender. This definition was redefined to clarify the relationship 
between an entity that is seeking to participate (lending entity) and 
one that has been approved (lender).
    Lender's agreement. This definition was revised to refer to it as a 
form.
    Lending entity. This definition was added to clarify the 
applicability of the rule's requirements.
    Loan note guarantee. This definition was revised to refer to it as 
a form.
    Material change. This definition replaces the definition for 
``substantive change'' and is used to provide consistency with the 
rule.
    Monetary default. This definition was added to clarify when certain 
requirements in the rule apply to ``monetary defaults'' or to defaults 
in general.
    Negligent loan origination. This definition was revised by changing 
``at the time of the loan'' to ``at the time the loan is made.'' This 
clarifies how this aspect of negligent loan origination will be 
evaluated by the Agency. (paragraph (2))
    Negligent loan servicing. The phrase ``with its current servicing 
policies and procedures'' was replaced with ``with its servicing 
policies and procedures in use by the lender at the time the loan is 
made.'' This clarifies how this aspect of negligent loan servicing will 
be evaluated by the Agency. (paragraph (2))
    Other lending entity. This definition was added to clarify the 
provisions of the rule.
    Permanent working capital. This definition was deleted. Instead, as 
shown below, the Agency is defining ``working capital.'' This change 
was made to clarify the Agency's intent and to make the Agency's intent 
clearer to the commercial lending community.
    Person. This definition was revised to include public bodies, which 
will ensure such entities as Tribes are included.
    Post-application. There were two changes to this definition.
    First. The word ``applicant'' was replaced with ``borrower'' to 
clarify that it is the borrower's eligibility being determined and not 
the lender's eligibility.
    Second. The phrase ``to score the application'' was removed because 
it is no longer needed under the rule.
    Pre-application. This definition was added to clarify what 
constitutes a pre-application.
    Preferred lender. This definition was added to clarify who is 
subject to the preferred lender provisions of the rule.
    Preliminary architectural report. This definition was added as a 
conforming change to the rule.
    Preliminary engineering report. Reference to the RUS bulletins was 
removed. These will be addressed in the handbook to the rule.

[[Page 76702]]

    Promissory note. This definition was revised to remove the phrase 
``or on demand'' from the end of the first sentence because 
guaranteeing a demand note can create a balloon payment.
    Qualified consultant. This definition was added because the rule 
now has provisions that require the use of a ``qualified consultant.''
    Regulated or supervised lender. This definition was revised by 
removing the word ``credit'' and by replacing the word ``and'' with 
``or'' in two places to ensure that the sentence was not interpreted as 
requiring both conditions.
    Renewable biomass. This definition was added because the revision 
to the definition of ``renewable energy'' uses the term. This 
definition is from the 2008 Farm Bill.
    Renewable energy. This definition was revised based on the 
definition in the 2008 Farm Bill.
    Rural or rural area. This definition was revised to clarify what 
constitutes rural or rural areas. In addition, a paragraph was added 
for determining which census blocks in an urbanized area are not in a 
rural area.
    Startup business. This definition was completely revised in 
response to comments to clarify the types of business that would 
constitute startup businesses.
    State. This definition was clarified to indicate that ``any of the 
50 States'' referred to those ``of the United States.''
    Substantive change. This definition was removed and replaced by the 
definition ``material change.''
    Tangible net worth. This definition was added because it is now 
used in the financial metric criteria used to determine project 
eligibility.
    Unincorporated area. This definition was deleted because it is no 
longer needed as the result of changes to the definition of ``rural or 
rural area.''
    Working capital. This definition was added to the rule to replace 
``permanent working capital.'' It is defined as ``Current assets 
available to support a business' operations and growth. Working capital 
is calculated as current assets less current liabilities.''
    Finally, paragraph (b), ``abbreviations'' was removed because it is 
no longer needed for the rule.
Agency Authorities (Sec.  5001.3)
    Exception authority (Sec.  5001.3(a)). The Agency revised paragraph 
(a)(1) in this section by replacing ``applicant'' with ``lender'' to 
clarify that it is both the lender's eligibility and the borrower's 
eligibility that cannot be excepted.
    Review or appeal rights (Sec.  5001.3(b)). The words ``Review or'' 
were added to the heading. The definition was revised by removing 
reference to ``the appropriate Agency official that oversees the 
program in question'' so that a person seeking review would seek such 
review from the National Appeals Division in accordance with the 
Division's regulation.
Oversight and Monitoring (Sec.  5001.4)
    Paragraph (a) was modified to clarify that the lender is required 
to cooperate fully with the Agency in the Agency's oversight and 
monitoring of lenders.
    Paragraph (b)(1) was corrected by replacing the word ``lender'' 
with ``borrower'' so that it now reads ``any material change in the 
general financial condition of the borrower.''
    Paragraph (b)(2) was revised to indicate that monthly default 
reports are required for loans that are in monetary default. At 
proposal, this provision referred to a loan that goes into default, 
without specifying what kind of default.
    Paragraph (b)(3) was modified in two ways:
    First. Notifications are required within 15 calendar days rather 
than 5 days as was proposed.
    Second. Notifications are now being required for loans made under 
this part that receive any downgrade in their classification.
    Paragraph (b)(4) was added to require, from a lender who receives a 
final loss payment, an annual report on the lender's collection 
activities for each unsatisfied account for 3 years following payment 
of the final loss claim. This requirement was added to help the Agency 
manage and mitigate risk inherent in delivering and administering this 
program.
Project Eligibility (Sec.  5001.6)
    Numerous changes were made to this section.
    First. The introductory text was modified to indicate that the 
requirements in this section apply to both borrower and project 
elements.
    Second. A new paragraph (a) replaces paragraphs (a) and (b) in the 
proposed rule. Paragraph (a) references the reader to the project 
requirements specified in subpart B. Because the requirements in 
subpart B address the two requirements identified in proposed 
paragraphs (a) and (b), the Agency removed these two proposed 
paragraphs from this section.
    Third. Paragraph (b), which corresponds to paragraph (c) in the 
proposed rule, addresses the financial metric criteria. Changes 
incorporated in this paragraph are:
     The rule clarifies that these financial metric criteria 
are based on the borrower and not on the individual project;
     The Agency has added that these financial metric criteria 
are to be calculated from ``the realistic information in the pro forma 
statements or borrower financial statements * * * of a typically 
operating year after the project is completed and stabilized;'' and
     The Agency has replaced the proposed cash equity criterion 
with a debt-to-tangible net worth ratio criterion.
Unauthorized Projects and Purposes (Sec.  5001.7)
    Paragraph (b) has been revised to refer to only golf courses and 
similar recreational facilities. The references to racetracks, water 
parks, and ski slopes found in the proposed rule have been relocated to 
subpart B in the Community Facilities provisions. However, the Agency 
has added additional underwriting criteria that allows the Agency to 
require higher underwriting standards for projects that are deemed more 
risky, such as racetracks and water parks.
    Paragraph (c), which addresses businesses deriving more than 10% of 
its annual gross revenue from gambling activity, has been modified by 
allowing State-authorized proceeds and, for public bodies and for not-
for-profit approved projects only, any other funds derived from 
gambling proceeds, as approved by the Agency, to be excluded from this 
calculation.
    Paragraph (e) was reorganized to make clear that ``made by other 
Federal agencies'' applies to loans and not to lines of credits or 
lease payment. The introductory text to paragraph (e) was revised to 
read ``Any guarantee of a:'' rather than ``Any:''.
    Proposed paragraph (g), which addressed facilities used primarily 
for the purpose of housing Federal and State agencies, was removed from 
subpart A in the rule and is addressed, instead, in subpart B for 
Community Facilities.
    Paragraph (h) addresses any business deriving income from illegal 
drugs, drug paraphernalia, and other illegal product or activity. At 
proposal, this paragraph used the phrase ``deriving income from the 
sale of illegal drugs.'' The Agency removed the phrase ``the sale of'' 
as it is unnecessary and potentially too restrictive.
    Paragraph (i) was rephrased to clarify that payment to the borrower 
for the rental of equipment or machinery owned by the borrower is an 
unauthorized purpose.

[[Page 76703]]

    Paragraph (j) was revised from ``The payment of a judgment'' to 
``The payment of either a Federal judgment or a debt owed to the United 
States, excluding other Federal loans.''
    Paragraph (k) was revised to read ``Any project that creates, 
directly or indirectly, a conflict of interest or an appearance of a 
conflict of interest.'' At proposal, this provision read ``Any project 
resulting in a conflict of interest.''
Borrower Eligibility (Sec.  5001.8)
    Paragraph (a)(1)(i) was modified to make clear that citizens of the 
U.S. include citizens of the Republic of Palau, the Federated States of 
Micronesia, the Republic of the Marshall Islands, and American Samoa.
    Paragraph (a)(1)(ii) was modified to address the clarification made 
in paragraph (a)(1)(i) of this section and to add ``or controlled'' 
after ``Entities other than individuals must be at least 51% owned.''
    Paragraph (b) was revised to include the provision that a borrower 
would be ineligible if any owner with more than 20 percent ownership 
interest in the borrower was also found to be ineligible using the same 
criteria provided for the borrower itself.
Participation Eligibility Requirements (Sec.  5001.9)
    The Agency has made numerous and significant changes to this 
section, which was titled Lender Eligibility and Designation in the 
proposed rule.
    A new paragraph (a) was added that identifies three requirements 
applicable to all lending entities (at proposal, the term used was 
lenders) that wish to participate in this program. These three 
requirements are:
     Submittal of a written summary of their loan origination 
and servicing policies and procedures. Under the proposed rule, all 
lending entities would have been required to submit copies of these 
policies and procedures (see also Sec.  5001.9(b)(1)(ii), (b)(2), and 
(c)(2)(i)).
     Maintenance of internal audit and management control 
systems to evaluate and monitor the overall quality of their loan 
origination and servicing activities. This was not part of the proposed 
rule.
     Not being otherwise debarred or suspended by the Federal 
government. This was part of the proposed rule.
    Paragraph (b), which corresponds to paragraph (a) under this 
section in the proposed rule, includes revisions for regulated or 
supervised lending entities that do not have an outstanding Agency 
guaranteed loan with the Agency (referred to at proposal as not having 
an existing portfolio) and for regulated or supervised lending entities 
that have at least one outstanding Agency guaranteed loan. The interim 
rule makes clear that the determination of whether a lending entity has 
an outstanding Agency guaranteed loan is based on the date on which the 
interim rule is effective.
    For regulated and supervised lending entities that do not have 
outstanding guaranteed loans, the interim rule makes clear as to whom 
the lending entity is to submit the lender application (Sec.  
5001.9(b)(1)(i)). At proposal, the rule did not make clear to whom a 
federally chartered lending entity would submit the lender application.
    The interim rule requires regulated and supervised lending entities 
that do not have outstanding guaranteed loans to submit information on 
their lending history and experience with their lender application 
(Sec.  5001.9(b)(1)(iii)). This was not part of the proposed rule. The 
Agency believes that this requirement will allow the Agency to further 
reduce institutional risk.
    Lastly, for these lending entities, the interim rule identifies the 
process under which the Agency will determine whether or not to approve 
the lender application (Sec.  5001.9(b)(1)(iv)). At proposal, this 
process was not addressed other than to make reference to the 
requirement that the lending entity be in good standing with its 
regulator.
    For regulated or supervised lending entities that have at least one 
outstanding Agency guaranteed loan, the interim rule makes clear the 
process under which the Agency will approve such lenders (Sec.  
5001.9(b)(2)(i) and (ii)).
    In paragraph (b)(4), the Agency has expanded the requirements for 
approved regulated or supervised lenders to maintain their approved 
status (proposed Sec.  5001.9(a)(3)) to include the provision that if a 
lender fails to maintain its status as a lender or has no outstanding 
loans with the Agency for two consecutive years, it must reapply under 
this section for lender approval.
    The Agency has also modified the requirements for other lending 
entities (referred to as ``other lenders'' in the proposed rule) to 
participate in this program. The Agency has added the requirement that 
other lending entities must have undergone an examination acceptable to 
the Agency in order to be eligible for submitting a lender application 
for approval (Sec.  5001.9(c)(1)(iv)). The Agency added this criterion 
in response to public comments and its assessment that such an 
examination will assist the Agency in mitigating institutional risk. 
The results of this examination are to be submitted with the lender 
application (Sec.  5001.9(c)(2)(viii)).
    Paragraph 5001.9(c)(2) was modified to indicate that certificates 
of good standing must be obtained from the States in which the other 
lending entity is licensed and intends to conduct business; at 
proposal, this provision did not include the ``is licensed'' aspect of 
the provision.
    Paragraph 5001.9(c)(3) makes clearer the process that the Agency 
will use in reviewing other lending entity applications for lender 
approval, which is very similar to what was proposed.
    Paragraph 5001.9(c)(5), which addresses maintenance of approved 
status for approved other lenders, adds the requirement (as for 
regulated or supervised lenders) that if the lender fails to maintain 
its status as a lender or has no outstanding loans with the Agency for 
two consecutive years, it must reapply under this section for lender 
approval.
    Lastly, the Agency has revised the requirements associated with 
preferred lenders. Under the interim rule, preferred lender status will 
apply only to lenders participating in the Business and Industry 
guaranteed loan program. The Agency may administratively allow other 
programs to have preferred lender status at some date in the future 
and, in this event, would publish a Federal Register Notice to this 
effect. Under the proposed rule, any approved lender could apply for 
preferred lender status. In making this change, the Agency has dropped 
in its entirety proposed Sec.  5001.9(c), Lender designation.
    Paragraph (d) of this section addresses all of the requirements 
associated with preferred lenders. The proposed rule (Sec.  
5001.9(c)(1)(i) through (c)(1)(iii)) identified three criteria--current 
level of experience, number of losses (which varied depending on how 
long the lender was making commercial loans), and instances of Federal 
government negligent loan origination or servicing. The interim rule 
identifies seven criteria to be met to become a preferred lender:
     Lender loss rate not in excess of a maximum ``preferred 
lender'' loss rate;
     A minimum of 10 guaranteed Business and Industry loans, 
unless otherwise provided for in a notice in the Federal Register;
     Consistent practice of submitting guaranteed loan 
applications with accurate information supporting a sound loan 
proposal;
     No more than one instance of Federal government loan 
origination or servicing where a loss has been paid;

[[Page 76704]]

     Not be under any regulatory enforcement action;
     Demonstrated high standards of professional competence; 
and
     Adequate lender facilities to conduct its Agency business 
at a high level of performance.
    The Agency will publish in the Federal Register notices that 
identify the maximum preferred lender loss rate and minimum number of 
guaranteed Business and Industry loans to qualify for preferred lender 
status when there are changes in these rates or numbers.
    Paragraph (d)(2) requires the lender to identify the States in 
which the lender is seeking preferred status and to identify those 
branch offices for which it is seeking preferred lender status. Under 
the proposed rule, a lender approved as a preferred lender would have 
preferred lender status in each State.
    Paragraph (d)(3) allows the lender to have preferred lender status 
for a period not to exceed 4 years and requires the lender to submit 
material to retain preferred status once the 4 years (or other 
applicable time period) has expired. At proposal, there was no 
timeframe associated with preferred lender status.
    Paragraph (d)(4) identifies the situations under which a lender may 
lose its preferred status. The interim rule contains more specifics 
than found in the proposed rule and applies the criteria under which a 
lender can lose its preferred lender status regardless of how long the 
lender has been making commercial loans.
Guarantee Application Process (Sec.  5001.11)
    The Agency has made two changes to this section.
    First. The Agency has clarified Sec.  5001.11(b)(2) by defining 
what is meant by ``those areas'' in the paragraph where it states, in 
part, ``the Agency may require the lender to obtain additional 
assistance in those areas where the lender does not have the requisite 
expertise to originate or service the loan.''
    Second. The Agency has added a new paragraph (c) in which the 
Agency will approve (subject to the availability of funds) or reject 
complete applications from preferred lenders within 10 working days 
after their receipt. This processing timeframe will not begin until all 
information required to make an approval decision, including a 
completed environmental review, is received by the Agency.
Application for Loan Guarantee Content (Sec.  5001.12)
    The Agency has made significant changes to this section in the 
interim rule.
    First. The rule no longer differentiates between full documentation 
applications and low documentation applications. Instead, all approved 
lenders submit applications that contain information that is very 
similar to what would have been required under the proposed rule's 
``full documentation'' applications. The interim rule does not contain 
a low documentation application provision and, as such, no longer 
requires a ``determination of documentation level'' provision as 
provided in the proposed rule (proposed Sec.  5001.12(c)).
    Second. The interim rule provides requirements for guarantee loan 
applications from preferred lenders. While guarantee loan applications 
from preferred lenders require less documentation than those from 
approved lenders, they are not referred to as ``low documentation'' 
applications in the interim rule, but as ``preferred lender'' loan 
guarantee applications.
    The loan guarantee application requirements for approved lenders 
are the same as those found in the proposed rule for full documentation 
applications, with the following exceptions:
     A copy of Form 10-K is no longer required to be submitted 
for companies listed on major stock exchanges (proposed Sec.  
5001.12(a)(5)).
     The proposed loan agreement between the lender and the 
borrower is no longer required to be submitted (proposed Sec.  
5001.12(a)(6)).
     Appraisals acceptable to the Agency are to be submitted if 
available. If they are not available at the time the application is 
submitted, complete appraisals must be submitted to the Agency before 
loan closing. At proposal, this requirement stated ``Appraisals (as 
specified in Sec.  5001.16(c))'' (proposed Sec.  5001.12(a)(8)).
     In newly designated Sec.  5001.12(a)(8), the ``for for-
profit'' qualifier for nursing homes has been removed (proposed Sec.  
5001.12(a)(11)).
     In newly designated Sec.  5001.12(a)(9), the word 
``prospective'' was removed because it is no longer needed (proposed 
Sec.  5001.12.(a)(13)).
     Proposed Sec.  5001.12(a)(12) for preliminary engineering 
report was relocated to subpart B for the water and waste disposal 
facility program.
     Proposed Sec.  5001.12(a)(14) requiring the most recent 
audited financial statements if the guaranteed loan is $1 million or 
more is significantly revised. In the interim rule, this paragraph 
(Sec.  5001.12(a)(10)) requires borrowers that have been in existence 
for one or more years seeking a guaranteed loan of $3 million or more 
to submit their most recent audited financial statements, unless 
alternative financial statements are authorized by the Agency. For 
borrowers that have been in existence for one or more years seeking a 
guaranteed loan of less than $3 million, the interim rule requires such 
borrowers to submit either the most recent audited or Agency-acceptable 
financial statements of the borrower. Lastly, for borrowers that have 
been in existence for less than one year, the interim rule requires the 
submittal of ``the most recent Agency-authorized financial statements 
of the borrower regardless of the amount of the guaranteed loan 
request.'' Paragraph 5001.12(a)(10)(iii) allows the Agency to request 
additional financial statements and related information depending on 
the complexity of the project.
     Finally, newly designated Sec.  5001.12(a)(11) has been 
added to provide the Agency the flexibility to request any additional 
information determined by the Agency as necessary to evaluate the 
application.
    The provisions for guaranteed loan applications for preferred 
lenders are found in Sec.  5001.12(b), and are new to the rule. 
Preferred lenders are required to submit:
     A copy of Form RD 5001-3, ``Application for Loan 
Guarantee'';
     Information sufficient for the Agency to confirm project 
and borrower eligibility;
     A copy of lender's loan evaluation and analysis;
     An internal loan approval document showing approval by in-
house appropriate office/committee; and
     Environmental information required by the Agency to 
conduct its environmental reviews (as specified in Sec.  5001.16(h)).
Lender Responsibilities--General (Sec.  5001.15)
    The interim rule contains three additional requirements applicable 
to all lenders participating in this program to help further mitigate 
institutional risk. These requirements are:
     Notifying the Agency of any changes to its loan 
origination and servicing policies and procedures provided under Sec.  
5001.9(a). For any changes to the lender's loan origination and 
servicing policies and procedures that are inconsistent with the 
requirements of this part, the lender must notify the Agency in writing 
and

[[Page 76705]]

receive written Agency approval prior to applying the changes to loan 
guarantees under this part.
     Compiling and maintaining in its files a complete 
application for each guaranteed loan for at least one year after the 
final loss has been paid.
     Maintaining internal audit and management control systems 
to evaluate and monitor the overall quality of its loan origination and 
servicing activities.
Lender Responsibilities--Origination (Sec.  5001.16)
    The Agency has made a number of changes to this section. One 
editorial change throughout the section was the replacement of the 
words ``prospective borrower'' with ``borrower'' (e.g., Sec.  
5001.16(b)(2)(i)).
    General (Sec.  5001.16(a)). In the introductory text to Sec.  
5001.16(a), the Agency made two substantive changes.
    First. The Agency revised the first sentence to read: ``The lender 
is responsible for originating all loans in accordance with its loan 
origination policies and procedures at the time the loan is made and 
with the requirements of this part.'' The text in the proposed rule did 
not include ``at the time the loan is made.'' The revised sentence also 
replaces the phrase ``current written policies and procedures'' with 
``loan origination policies and procedures.''
    Second. The Agency revised the second sentence to read: ``Where a 
lender's loan origination policies and procedures address a 
corresponding requirement in this part, the lender must comply with 
whichever is more stringent, unless otherwise approved by the Agency.'' 
The text in the proposed rule did not include the phrase ``unless 
otherwise approved by the Agency.'' This added phrase is cross-
referenced as necessary in other places within the interim rule (e.g., 
Sec.  5001.16(b)). The inclusion of this phrase allows the Agency and 
the lender to work together and to consider each loan application on a 
case-by-case basis.
    The Agency has also added a requirement (Sec.  5001.16(a)(2)) for 
the lender to provide the Agency the lender's classification of the 
loan no later than 90 days after loan closing.
    Appraisals (Sec.  5001.16(c)). The Agency made three changes to the 
introductory text to this paragraph and one change to Sec.  
5001.16(c)(2).
    In the introductory text, the Agency included chattel collateral 
appraisals, which were not addressed in the proposed rule. In addition, 
the Agency dropped reference to specific sections within the Uniform 
Standards of Professional Appraisal Practices (USPAP) standards, as 
these were unnecessary to continue to include in the rule. Lastly, the 
Agency added the provision that complete appraisals must be submitted 
to the Agency before loan closing.
    In Sec.  5001.16(c)(2), the Agency added that the potential effect 
of environmental hazards on the market value of the collateral are to 
be ``determined in accordance with the appropriate ASTM Real Estate 
Assessment and Management environmental standards.''
    Personal, partnership, and corporate guarantees (Sec.  5001.16(d)). 
The heading has been revised to include ``partnership.'' In addition, 
here and elsewhere in the rule, the Agency revised the phrase 
``personal or corporate guarantees'' (and similar phrases) to 
``personal, partnership, or corporate guarantees.''
    The proposed rule was not clearly written as which personal, 
partnership, and corporate guarantees could be used to secure a loan. A 
new paragraph (d)(1) has been added to make clear that secured, 
unconditional personal, partnership, and corporate guarantees may be 
used to determine the security of the loan, but that unsecured, 
unconditional personal, partnership, and corporate guarantees will not 
be considered in determining whether a loan is adequately secured for 
loan making purposes.
    Re-designated paragraph (d)(2) addresses Agency-approved, unsecured 
personal, partnership, and corporate guarantees and incorporates the 
provision found in the proposed rule under proposed Sec.  5001.16(d)(1) 
and (d)(2). Concerning exceptions to the requirement for personal 
guarantees, the Agency replaced ``concurred by the Agency approval 
official'' with ``approved by the Agency.''
    Lastly, a new paragraph (d)(3) was added to address the requirement 
for guarantors to execute an Agency-approved unconditional guarantee 
(which was required in the proposed rule). The interim rule adds three 
provisions to explain how amounts paid by the Agency will constitute a 
Federal debt and the handling of interest charges. These provisions 
are:
     Any amounts paid by the Agency on account of liabilities 
of an Agency guaranteed loan borrower will constitute a Federal debt 
owed to the Agency by the guaranteed loan borrower. In such case, the 
Agency may use all remedies available to it, including offset under the 
Debt Collection Improvement Act of 1996, to collect the debt from the 
borrower.
     Any amounts paid by the Agency pursuant to a claim by a 
guaranteed program lender will constitute a Federal debt owed to the 
Agency by a third-party guarantor of the loan, to the extent of the 
amount of the third-party guarantee. In such case, the Agency may use 
all remedies available to it, including offset under the Debt 
Collection Improvement Act of 1996, to collect the debt from the third-
party guarantor.
     In all instances under the above paragraphs, interest 
charges will be assessed in accordance with 7 CFR 1951.133.
    Design requirements (Sec.  5001.16(e)). The Agency made two 
substantive changes to this paragraph.
    First. The phrase ``or other Agency-approved code'' was added to 
the end of the first sentence.
    Second. In the second sentence the word ``original'' was replaced 
with the word ``approved.''
    Compliance with other Federal Laws (Sec.  5001.16(g)). The Agency 
removed the last sentence in the proposed rule text, because it is not 
applicable to guaranteed loans.
    Conflicts of interest (Sec.  5001.16(i)). The Agency added the 
phrase ``and appearances of conflicts of interest'' to the end of this 
paragraph, which should have been included in the proposed rule.
    Surety (Sec.  5001.16(j)). The Agency added this paragraph to the 
rule. Under this paragraph, surety will be required in cases when the 
guarantee will be issued prior to completion of construction unless the 
contractor will receive a lump sum payment at the end of work. In 
addition, surety is to be made a part of the contract, if the applicant 
requests it or if the contractor requests partial payments for 
construction work. Finally a latent defects bond may be required to 
cover the work in instances where no surety is provided and the project 
involves pre-commercial technology, first of its type in the U.S., or 
new designs without sufficient operating hours to prove their merit.
Lender's Responsibilities--Servicing (Sec.  5001.17)
    General (Sec.  5001.17(a)). Consistent with the revision made to 
Sec.  5001.16(a), the Agency revised the second sentence to read 
``Where a lender's loan servicing policies and procedures address a 
corresponding requirement in this part, the lender must comply with 
whichever is more stringent, unless otherwise approved by the Agency.'' 
The text in the proposed rule did not include the phrase ``unless 
otherwise approved by

[[Page 76706]]

the Agency.'' This added phrase is cross-referenced as necessary in 
other places within the interim rule (e.g., Sec.  5001.17(b)). The 
inclusion of this phrase allows the Agency and the lender to work 
together and to consider each loan application on a case-by-case basis.
    The revised sentence also replaces ``current written policies and 
procedures'' with ``loan servicing policies and procedures.''
    Certification (Sec.  5001.17(b)). The phrase ``current written'' 
was removed from this paragraph and a cross-reference to the exception 
to the ``whichever is more stringent'' requirement in paragraph (a) of 
this section was added.
    Audits (Sec.  5001.17(c)). This is a new provision, which requires 
lenders, when applicable, to audit a borrower in accordance with Office 
of Management and Budget requirements.
    Financial reports (Sec.  5001.17(d)). This is a new provision 
addressing when lenders are to submit financial reports of the 
borrower. The requirements differ depending on whether or not the 
lender is a regulated or supervised lender. Specifically, these 
requirements are:
     For regulated or supervised lenders, the information that 
would be contained in financial reports required by the appropriate 
regulatory institution. Unless otherwise provided in the Conditional 
Commitment, such information must be submitted at the same time it 
should be made available to the appropriate regulatory institution.
     For lenders who are not regulated or supervised, financial 
reports as required in the Conditional Commitment.
    Collateral inspection and release (Sec.  5001.17(e)). As proposed 
(Sec.  5001.17(c)), the Agency would have been allowed to require the 
lender to obtain prior Agency approval of any release of collateral and 
to require an appraisal on the remaining collateral in cases in which 
the Agency determined that it may be adversely affected by the release. 
Because the proposed rule did not clearly indicate when such appraisals 
would be required, the Agency has revised this provision to state that:
     It will require prior approval of the release of 
collateral except in two instances--where the proceeds are used to pay 
down debt in order of lien priority, or to acquire replacement 
equipment, or where the release of collateral is made under the 
abundance of collateral provision of an applicable security agreement 
(e.g., a blanket security agreement); and
     Appraisals on the collateral being released will be 
required on all transactions exceeding $250,000.
    The Agency has also revised this paragraph by adding the phrase 
``unless otherwise approved by the Agency in writing'' to the end of 
the last sentence and deleting ``In all cases'' from the beginning of 
the last sentence, which now reads in full ``The sale or release of 
collateral must be based on an arm's length transaction, unless 
otherwise approved by the Agency in writing.''
    Processing transfers and assumptions (Sec.  5001.17(f)(2)). As 
proposed (Sec.  5001.17(d)(2)), this paragraph would have allowed the 
lender to release the transferor (including any guarantor) from 
liability without Agency approval. The Agency has revised this 
provision to now require such releases to be subject to Agency 
approval.
    The Agency also added conditions under which the transferor 
(including any guarantor) may be released from liability (Sec.  
5001.17(f)(2)(iii)).
    Mergers (Sec.  5001.17(g)). As proposed (Sec.  5001.17(e)), the 
Agency would have been allowed to withdraw the guarantee when a 
borrower participates in a merger. This provision has been revised 
entirely. In the interim rule, all borrower mergers require prior 
approval by the Agency and the lender. Further, if a borrower merges 
without Agency approval, the lender must accelerate the loan unless 
subsequently agreed to in writing by the Agency.
    Subordination of lien position (Sec.  5001.17(h)). The Agency has 
made several revisions to the Agency's concurrence as follows:
     The proposed rule required that the Agency's financial 
interest be enhanced. This has been changed to the subordination being 
in the Agency's best financial interest.
     The proposed rule required that the collateral will remain 
adequate to secure the loan. This has been removed from the interim 
rule.
     The proposed rule limited a subordination to a revolving 
line of credit to no more than one year. This has been changed to read 
``the subordination of line of credit does not extend the term of the 
line of credit and in no event exceeds more than three years.''
    Repurchases from holder(s) (Sec.  5001.17(i)). The Agency has made 
two changes to the introductory text to this paragraph.
    First. The first sentence was revised to refer to ``monetary 
default'' rather than ``default'' so that the first sentence now reads, 
in part, ``the Agency to repurchase the unpaid guarantee portion of the 
loan in the case of borrower monetary default or failure of the lender 
to pay the holder its pro-rata share.''
    Second. In the beginning of the second sentence the word ``or'' is 
replaced with ``and'' to read: ``When the lender and the Agency 
determine that repurchase is necessary to adequately service the loan, 
the holder must sell the guaranteed portion to the requesting entity.'' 
This edit was made in order to ensure that the Agency always 
participates in this decision.
    The Agency added to this section a new paragraph (i)(2) addressing 
provisions regarding repurchase by lender for servicing.
    Within the provisions for repurchases by the Agency (Sec.  
5001.17(i)(3)), ``unless provided for in the Assignment Guarantee 
Agreement'' was deleted from the end of the sentence ``The lender may 
not charge the Agency any fees.'' In addition, language was added 
addressing the calculation of the amount of the repurchase and the 
length of accruing interest that will be covered (Sec.  
5001.17(i)(3)(iii)).
    Additional expenditures and loans (Sec.  5001.17(j)). The Agency 
made two edits to this provision. The words ``will not'' were replaced 
by the word ``may'' and the phrase ``unless the expenditure or loan 
will violate one or more of the loan covenants of the borrower's loan 
agreement'' was added at the end of the paragraph.
    Lender failure (Sec.  5001.17(k)). The Agency added the phrase ``or 
ceases servicing the loan,'' in the first sentence to read: ``In the 
event a lending institution fails or ceases servicing the loan, the 
Agency will provide instruction to the successor entity on a case-by-
case basis.''
    Delinquent loans (Sec.  5001.17(l)). The phrase ``coordinate with 
the Agency and the borrower to'' was removed so that the second 
sentence reads: ``If a borrower is delinquent more than 30 days, the 
lender must implement appropriate curative actions to resolve the 
problem.''
    Protective advances (Sec.  5001.17(m)). The Agency added four 
additional conditions associated with protective advances. These 
additional conditions are:
     Protective advances must constitute an indebtedness of the 
borrower to the lender and be secured by the security instruments. 
(Sec.  5001.17(m)(4))
     Upon Agency approval, protective advances can be used to 
pay Federal tax liens and other Federal debt. (Sec.  5001.17(m)(5))
     Protective advances and interest thereon at the note rate 
will be guaranteed at the same percentage of

[[Page 76707]]

loss as provided in the Loan Note Guarantee. (Sec.  5001.17(m)(6))
     The maximum loss to be paid by the Agency will be 
determined according to the procedures specified in Sec.  5001.17(p)(1) 
regardless of any protective advances made. (Sec.  5001.17(m)(7))
    Liquidation (Sec.  5001.17(n)). The Agency has made several 
modifications to this paragraph.
    First. In the introductory text, the phrase ``and the Agency will 
then liquidate the loan'' was added to the end of the paragraph to 
read: ``The Agency reserves the right to unilaterally conclude that 
liquidation is necessary and require the lender to assign the security 
instruments to the Agency and the Agency will then liquidate the 
loan.''
    Second. The Agency has added the provisions that it will approve or 
disapprove the plan within 30 days and that, upon approval of the 
liquidation plan by the Agency, the lender may implement the plan. 
(Sec.  5001.17(n)(1)(i)).
    Third. A new paragraph (n)(1)(ii) has been added that addresses 
liquidation appraisals. This paragraph requires liquidation appraisals 
to be a part of the liquidation planning process. It further states 
that they are not required for liquidation plan approval, provided they 
are obtained prior to the completion of the liquidation. Lastly, this 
paragraph states that, if the outstanding principal loan balance 
including accrued interest is more than $200,000, the lender will 
obtain an independent appraisal report on all collateral securing the 
loan, which will reflect the current market value and potential 
liquidation value.
    Fourth. A new paragraph (n)(1)(iii) has been added containing 
provisions for appraisal costs. Under this new paragraph, any 
independent appraiser's fee will be shared equally by the Agency and 
the lender. In addition, if an environmental site assessment in 
accordance with the appropriate ASTM Real Estate Assessment and 
Management environmental standards of the property is necessary in 
connection with liquidation, the cost will be shared equally between 
the Agency and the lender.
    Fifth. A new paragraph (n)(1)(iv) has been added containing 
provisions for rent. Under this new paragraph, any net rental or other 
income that has been received by the lender from collateral will be 
applied on the guaranteed loan debt.
    Loss calculations and payment (Sec.  5001.17(p)). The Agency has 
substantially rewritten the introductory paragraph to this section 
detailing how estimated losses and final losses are calculated. The 
Agency also made several other revisions to this paragraph.
    First. A new paragraph (p)(1) has been added to address maximum 
loss. The proposed rule (Sec.  5001.17(n)) stated in the introductory 
text that ``The maximum loss allowed is the lower of the percent of 
loss guarantee times the foregoing or the sum of principal advances and 
accrued interest. The amount due the lender is adjusted to take into 
account protective advances and accrued interest. The amount due the 
lender is adjusted to take into account protective advances and 
interest.'' The interim rule has revised the calculation of maximum 
loss to be in-line with current Business and Industry provisions.
    Second. The Agency added to this section a new paragraph (p)(2)(iv) 
stating that, upon payment of an estimated loss to the lender, interest 
accrual on the defaulted loan will be discontinued.
    Third. In Sec.  5001.17(p)(5)(i), the Agency has revised this 
paragraph to indicate that ``any loss will be based on the collateral 
value at the time the collateral is liquidated'' rather than, as 
proposed, ``at the time the lender obtains title.''
    Fourth. In Sec.  5001.17(p)(5)(ii), the Agency has revised this 
paragraph to include that the lender ``must submit an estimated loss 
claim when liquidation is expected to exceed 90 days.'' At proposal, 
this paragraph read ``it may request an estimated loss payment by 
submitting an estimate of loss that will occur in connection with 
liquidation of the loan.''
    Fifth. In Sec.  5001.17(p)(6), the Agency has replaced the proposed 
text (Sec.  5001.17(n)(4)) that stated ``The lender shall submit with 
each loss claim the current version of its written policies and 
procedures for origination and servicing'' with ``In response to a loss 
claim, the Agency may request and the lender must provide the Agency 
with a copy of the applicable loan origination and servicing policies 
and procedures in place for the loan.''
    Sixth. A new paragraph (Sec.  5001.17(p)(7)) has been added 
addressing final loss. This new paragraph states: When the Agency finds 
the final report of loss to be proper in all respects, it will approve 
the final loss. If the loss is less than the estimated loss payment, 
the lender will reimburse the Agency for the overpayment plus interest 
at the note rate from the date of the estimated loss payment.
Basic Guarantee and Loan Provisions
General (Sec.  5001.30)
    The Agency made three revisions to provisions within this section.
    First. Paragraph (b)(1) was revised so that the last sentence 
reads: ``The unguaranteed portion of the loan will neither be paid 
first nor given any preference or priority over the guaranteed 
portion.'' This means, for example, that in the case of a 1 million 
dollar loan where the Agency's participation is $800,000 and the 
lender's share is $200,000, each will be repaid pari passu; that is for 
each dollar repaid, the Agency would receive 80 cents and the lender 20 
cents. This change addresses one of the major concerns expressed by 
commenters. At proposal, this sentence read: ``The guaranteed portion 
will be paid first and given preference and priority over the 
unguaranteed portion.''
    Second. Paragraph (c)(1) was revised so that the last sentence 
reads: ``Any claim against a Loan Note Guarantee or Assignment 
Guarantee Agreement that is attached to, or relating to, a note that 
provides for payment of interest on interest will be reduced to remove 
the interest on interest.'' At proposal, this provision read: ``any 
Loan Note Guarantee or Assignment Guarantee Agreement attached to, or 
relating to, a note which provides for payment of interest on interest 
is void.''
    Third. Paragraph (c)(2) was revised so that the sentence that began 
``Any losses occasioned will not be enforceable by the lender to the 
extent'' now states ``Any losses occasioned by the lender will not be 
enforceable to the extent''.
Guaranteed Loan Requirements (Sec.  5001.31)
    The Agency has made changes to interest rates, renewal fees, and 
lender fees, as described below.
    Interest rates (Sec.  5001.31(a)). In the introductory text, the 
last sentence of the paragraph was removed. This sentence had stated: 
``When combined fixed and variable rates are used, the lender will 
provide the Agency with the overall effective interest rate for the 
entire loan.''
    Negotiated rates (Sec.  5001.31(a)(1)). The Agency has added to the 
end of this paragraph ``and will be subject to Agency concurrence'' so 
that this paragraph now reads ``Interest rates, interest rate caps, and 
incremental adjustment limitations will be negotiated between the 
lender and the borrower and will be subject to concurrence by the 
Agency.''
    Interest rate changes (Sec.  5001.31(b)(1)(i)). The Agency has

[[Page 76708]]

qualified the need to approve any change in the interest by adding 
``unless the only change is to the base rate of a variable interest 
rate.''
    Increases (Sec.  5001.31(b)(3)). The Agency has revised this 
paragraph in identifying when increases in the interest rate are not 
permitted. At proposal, this paragraph read: ``Increases in interest 
rates are not permitted except when the increase results from normal 
fluctuations in approved variable interest rates, or the increase 
returns the rate to the rate prior to the temporary reduction.'' In the 
interim rule, this paragraph now reads: ``Increases in interest rates 
are not permitted beyond what is provided in the loan documents. 
Increases from a variable interest rate to a higher interest rate that 
is a fixed rate are allowed, subject to concurrence by the Agency.''
    Guarantee fee (Sec.  5001.31(g)(1)). The payment of the guarantee 
fee was changed from ``at the time the Guarantee is issued'' to ``the 
time the lender requests the Loan Note Guarantee.''
    Renewal fee (Sec.  5001.31(g)(2)). As proposed, the annual renewal 
fee would have been assessed annually based on a fixed fee rate 
established ``at the beginning of the loan.'' The Agency has revised 
this phrase to read: ``at the time the loan is obligated.''
    Lender fees (Sec.  5001.31(h)). The Agency has added text to 
indicate that late payment fees can be part of the lender fees that 
lenders may levy. The revised text reads, in part, ``The lender may 
levy reasonable, routine, and customary charges and fees, including 
late payment fees, for the guaranteed loan.''
    The Agency has also identified default charges and additional 
interest expenses as two additional expenses that will not be covered 
by the Loan Note Guarantee.
Conditional Commitment (Sec.  5001.32)
    The Agency has identified two specific conditions to which the 
lender must certify in the Conditional Commitment (Sec.  5001.32(a)(1) 
and (2)). These two conditions are:
    (1) The lender will monitor construction in accordance with 
approved plans and specifications, and
    (2) Project funds will be used only for Agency-approved project 
costs.
Conditions Precedent to Issuance of Loan Note Guarantee (Sec.  5001.33)
    The Agency has substantially revised this section. Except for 
certification for insurance obtained by the borrower, the entire 
section has been revamped and greatly expanded by including in the rule 
17 specific conditions (Sec.  5001.33(a)) to which the lender must 
certify prior to the Agency's issuance of the Loan Note Guarantee under 
Sec.  5001.34. Subject areas addressed by the 17 conditions in Sec.  
5001.33(a) are:
     Changes in the lender's loan conditions and requirement 
since issuance of the Conditional Commitment;
     Planned property acquisitions;
     Insurance;
     Truth-in-lending and equal credit opportunity 
requirements;
     Closing and security instruments;
     Title to the collateral;
     Disbursement of working capital;
     Personal, partnership, or corporate guarantees;
     Requirements of the Conditional Commitment;
     Lien priorities;
     Disbursement of loan proceeds;
     Material changes during period between Conditional 
Commitment and issuance of the Loan Note Guarantee;
     Financial interest in the borrower;
     Loan agreement content;
     Anti-Lobby Act (18 U.S.C. 1913);
     Title to rights-of-ways and easements and title opinion or 
insurance; and
     Maintaining the minimum financial criteria under which a 
loan application has been submitted, including those financial criteria 
contained in the Conditional Commitment, through the issuance of the 
Loan Note Guarantee. If these financial criteria are not maintained, 
the application will be ineligible.
    In addition, a new paragraph (b) has been added, which requires the 
lender to provide an explanation satisfactory to the Agency if the 
lender is unable to provide any of these certifications.
Issuance of the Guarantee (Sec.  5001.34)
    A new paragraph (a), Loan agreement, has been added, which requires 
the lender to provide a copy of the loan agreement between the lender 
and the borrower to the Agency prior to loan closing.
    The Agency has moved the proposed requirement to provide the 
lender's certification and guarantee fee from proposed Sec.  5001.34(a) 
into Sec.  5001.34(b) and requires their provision at the time the 
lender requests the Loan Note Guarantee (rather than at loan closing as 
was proposed). Reference to the secondary market sale document has been 
dropped.
    Paragraph (c) essentially is the same as proposed Sec.  5001.34(b), 
with the reference to the issuance of the Assignment Guarantee 
Agreement dropped in the interim rule.
Reorganizations (Sec.  5001.36)
    The Agency has made changes to paragraphs (a) and (b) of this 
section.
    Change in borrower prior to closing (Sec.  5001.36(a)). As 
proposed, the last sentence in this paragraph read: ``Once the 
Conditional Commitment for Guarantee is issued, no substitution of 
borrower(s) or change in the form of legal entity will be approved, 
except that a change in the legal entity may be approved when the 
original borrower is replaced with substantially the same individuals 
or officers with the same interest as originally approved.'' The Agency 
has replaced the ``exception'' clause with ``unless Agency approval, in 
writing, is obtained'' so that this sentence now reads: ``Once the 
Conditional Commitment is issued, no substitution of borrower(s) or 
change in the form of legal entity will be approved, unless Agency 
approval, in writing, is obtained.''
    Transfer of lender prior to issuance of the Loan Note Guarantee 
(Sec.  5001.36(b)). The Agency has reorganized this paragraph and has 
made a few edits to it. One change to note is the clarification that 
when the transfer is from a preferred lender to an approved lender, the 
approved lender submits an application that conforms to the 
requirements for an approved lender application for guarantee as found 
in Sec.  5001.12(a).
Sale or Assignment of Guaranteed Loan (Sec.  5001.37)
    General (Sec.  5001.37(a)). The Agency revised the requirement for 
lender retention. At proposal, the lender would have been required to 
maintain ``sufficient interest to perform its duties under this part.'' 
In the interim rule, this has been revised to read that the lender must 
``retain a minimum of 5% of the total loan amount in its portfolio. The 
amount required to be retained must be of the unguaranteed portion of 
the loan and cannot be participated.''
    The Agency also modified paragraph (a)(5) by:
    (1) Removing ``at, or'', and
    (2) Replacing ``market'' with ``sell'' and ``in default'' with ``in 
monetary default'' so that the paragraph now reads: ``If the lender 
desires to sell all or part of the guaranteed portion of the loan 
subsequent to loan closing, the loan must not be in monetary default.''
    Lastly, the Agency removed proposed paragraph (a)(6), which 
addresses lender retention. This paragraph is no longer needed as a 
result of the other changes made in the interim rule.
    Servicing fee (Sec.  5001.37(b)). The Agency revised this paragraph 
to read:

[[Page 76709]]

``The lender cannot charge the Agency a servicing fee and no such fees 
are covered under the guarantee.'' At proposal, the paragraph was 
titled ``Termination of lender servicing fee,'' and read: ``The 
lender's servicing fee will stop when the Agency purchases the 
guaranteed portion of the loan from the secondary market. No such 
servicing fee may be charged to the Agency and all loan payments and 
collateral proceeds received will be applied first to the guaranteed 
loan.'' Provisions in this paragraph were revised in Sec.  5001.37(b) 
or carried over and revised in new paragraph, Sec.  5001.37(c), as 
discussed below.
    Distribution of proceeds (Sec.  5001.37(c)). The Agency added a 
separate paragraph to address the distribution of proceeds. As 
proposed, all loan payments and collateral proceeds received would have 
been applied first to the guaranteed loan. Instead, under the interim 
rule, all loan payments and collateral proceeds received will be 
applied to the guaranteed and unguaranteed portions of the loan on a 
pro rata basis.

Subpart B--Program Specific Provisions

Community Facilities Program (Sec.  5001.101)
    Eligible projects (Sec.  5001.101(a)). The Agency has added 
``except as provided in paragraph (a)(6) of this section'' to the end 
of the introductory text of paragraph (a). In addition, the Agency 
revised the requirements associated with refinancing (paragraph 
(a)(1)(vii) of this section) and added leasehold interest as a new 
eligible project (paragraph (a)(1)(viii) of this section).
    As proposed, the eligible project was ``refinancing any loan,'' and 
provided that ``Except for the refinancing of Agency direct loans, 
refinancing of other loans will be limited to a minority portion of the 
guaranteed loan.'' In the interim rule, this eligible purpose is now 
titled ``refinancing debt (excluding working capital debt, operating or 
other debt whose repayment is scheduled to take place in one year or 
less)'' and includes three specific conditions to be met:
     The debts being refinanced are less than 50% of the total 
loan;
     The debts were incurred for the facility or service being 
financed or any part thereof (such as interim financing, construction 
expenses, etc.); and
     Arrangements cannot be made with the creditors to extend 
or modify the terms of the debts so that a sound basis will exist for 
making a loan.
    The Agency, as noted above, has added ``leasehold interest'' as an 
eligible project and identifies several conditions, at a minimum, that 
must be met. These conditions are:
     The length of lease must be greater than or equal to loan 
term;
     There are no reverter clauses in the lease; and
     There are no restrictive clauses that would impair the use 
or value of the property as security for the loan.
    The Agency has added a new paragraph (a)(5) to this section, which 
requires the project to primarily serve a rural area.
    The Agency has revised the demonstration of community support 
(paragraph (a)(6)) to indicate that community support can be used in 
lieu of the debt-to-tangible net worth ratio and the loan-to-value 
ratio requirements for in subpart A. This is a conforming change.
    Unauthorized projects and purposes (Sec.  5001.101(b)). Proposed 
paragraphs (b)(1) and (b)(6) were removed because they were duplicative 
of subpart A provisions.
    The Agency added a new paragraph (b)(5), which identifies 
racetracks, water parks, and ski slopes as unauthorized projects and 
purposes. At proposal, these projects were identified in subpart A as 
unauthorized projects and purposes.
    Borrower eligibility (Sec.  5001.101(c)). The Agency added 
introductory text to this paragraph, added a new paragraph (c)(1) to 
clearly specify the eligible borrowers, and revised paragraph (c)(2) to 
identify the YMCA, YWCA, Girl Scouts, and Boy Scouts as eligible 
organizations. At proposal, this paragraph only made reference to the 
later organizations.
    Additional application documentation provisions (Sec.  
5001.101(d)). The Agency has added four additional documentation 
requirements--organizational documents of the borrower, a complete list 
of governing board members of the borrower, a copy of the management 
and other legal documents between the borrower and the proposed 
management company, and a preliminary architectural report.
    Additional application processing requirements--appraisals (Sec.  
5001.101(e)). This is a new paragraph to the rule. This paragraph 
states: ``When a loan's collateral appraises at a level less than 100% 
of the loan amount, the Agency will consider community support in 
evaluating the application for guarantee.''
    Additional origination responsibilities--leasehold interest (Sec.  
5001.101(f)). This is a new paragraph to the rule. This paragraph 
states: ``Subject to approval by the Agency, a leasehold interest may 
be used as collateral for loans under this section provided the 
leasehold interest meets each of the conditions specified in paragraphs 
(a)(1)(viii)(A) through (C) of this section.'' The cross-referenced 
paragraphs refer to the requirements for leasehold interest to be an 
eligible project.
    Additional servicing responsibilities--financial reports (Sec.  
5001.101(g)). This is a new paragraph, which states: ``Annual financial 
reports required shall conform to 7 CFR part 3052.''
    Additional guarantee- and loan-related requirements (Sec.  
5001.101(h)). With the elimination of the low documentation and the 
preferred lender provisions for this program, the maximum percent 
guarantee for all projects under this section is now 90%. At proposal, 
a lower maximum percent guarantee (80%) was identified for lenders 
without preferred lending status who submit low documentation 
applications.
Water and Waste Disposal Facilities Program (Sec.  5001.102)
    Project eligibility (Sec.  5001.102(a)). The Agency has revised the 
introductory text of paragraph (a) inserting ``except as provided in 
paragraph (a)(4) of this section'' to the end of the introductory text.
    Paragraph (a)(1)(i) was revised from ``a water or wastewater 
facility'' to now read ``a water, waste disposal, solid waste disposal, 
or storm water facility.''
    As for the Community Facilities program, the Agency has added a new 
paragraph (a)(3) to this section, which requires the project to 
primarily serve a rural area.
    Also, as for the Community Facilities program, the Agency has 
revised the demonstration of community support (paragraph (a)(4) of 
this section) to indicate that community support can be used in lieu of 
the debt-to-tangible net worth ratio and the loan-to-value ratio 
requirements for in subpart A. This is a conforming change.
    Unauthorized projects and purposes (Sec.  5001.102(b)). Proposed 
paragraph (b)(2) was removed because it was duplicative of a subpart A 
provision.
    The Agency clarified paragraphs (b)(5) and (b)(8) by replacing the 
word ``applicant'' with ``borrower.''
    The Agency added a new unauthorized project/purpose in paragraph 
(b)(6), which states: ``Any project where an individual, or membership 
of another organization sponsors the creation of a nonprofit 
organization with the intent to control negotiations for employment or

[[Page 76710]]

contracts that provide financial benefit to the sponsoring 
organization, affiliate organization, or a subsidiary organization of 
the sponsoring individuals or organization.''
    The Agency also removed proposed paragraph (b)(8), which addressed 
the payment of a judgment which would disqualify a borrower for a loan 
under proposed Sec.  5001.102(c)(2), because changes elsewhere in the 
interim rule made this paragraph duplicative and thus no longer 
necessary.
    Additional lender approval requirements (Sec.  5001.102(d)). This 
paragraph was added and states: ``The examination required under Sec.  
5001.9(c)(1)(iv) may be conducted by the Agency or a qualified 
consultant.'' This allows for the Agency to conduct the examination, 
whereas the referenced paragraph requires the examination to be 
conducted by a qualified consultant.
    Additional application documentation provisions (Sec.  
5001.102(e)). In paragraph (e)(1), the Agency rephrased ``qualified 
independent consultant'' to ``qualified consultant,'' because the term 
defined is ``qualified consultant'' and, as defined, includes the 
concept of ``independent.''
    As for the Community Facilities program, the Agency has added three 
additional documentation requirements--organizational documents of the 
borrower, a complete list of governing board members of the borrower, 
and a copy of the management and other legal documents between the 
borrower and the proposed management company.
    The Agency removed proposed Sec.  5001.102(d)(3), which addressed 
financial reports, because the requirement for financial reports is 
addressed in subpart A in the rule.
    The Agency added a new paragraph, Sec.  5001.(e)(6), requiring 
lenders to submit intergovernmental consultation comments in accordance 
with 7 CFR part 3015, subpart V, of this title.
    Additional servicing responsibilities--financial reports (Sec.  
5001.102(f)). As for the Community Facilities program, this is a new 
paragraph, which states: ``Annual financial reports required shall 
conform to 7 CFR part 3052.''
    Additional guarantee- and loan-related requirements (Sec.  
5001.102(g)). With the elimination of the low documentation and the 
preferred lender provisions for this program, the maximum percent 
guarantee for all projects under this section is now 90%. At proposal, 
a lower maximum percent guarantee (80%) was identified for lenders 
without preferred lending status who submit low documentation 
applications.
Business and Industry Loan Program (Sec.  5001.103)
    Definitions (Sec.  5001.103(a)). The Agency added two new 
definitions specific to this program in response to the 2008 Farm Bill. 
These definitions are for locally or regionally produced agricultural 
food product and for underserved community.
    Project eligibility (Sec.  5001.103(b)). The Agency made several 
changes in this paragraph.
    First. The Agency added the requirement that a project be located 
in a rural area (Sec.  5001.103(b)(1)).
    Second. The Agency removed the word ``permanent'' so that Sec.  
5001.103(b)(2)(iv) now refers to working capital rather than to 
permanent working capital.
    Third. The Agency revised the conditions under which refinancing 
would be an acceptable use of Agency funds. At proposal (Sec.  
5001.103(a)(1)(x)), the provision for refinancing any loan read: 
``Except for the refinancing of Agency direct loans, refinancing of 
other loans will be limited to a minority portion of the guaranteed 
loan.'' In the interim rule, this provision (Sec.  5001.103(b)(2)(x)) 
reads: ``refinancing any loan when the Agency determines that the 
project is viable and equal or better rates or terms are offered. Same 
lender debt refinancing will be additionally required to be less than 
50% of the new loan amount unless the amount of the loan to be 
refinanced is already Federally guaranteed. Subordinated owner debt is 
not eligible.''
    Fourth. The Agency moved the word ``complete'' from in front of 
``pre-application'' and placed it in front of ``application'' in Sec.  
5001.103(b)(2)(xi).
    Fifth. The Agency clarified that, while Business and Industry 
guarantee loan funds can be used for ``professional services,'' they 
cannot be used for either packager fees or broker fees (see Sec.  
5001.103(b)(2)(xii)).
    Sixth. The Agency modified the conditions associated with tourist 
and recreation facilities, including hotel, motels, and bed and 
breakfast establishments (Sec.  5001.103(b)(2)(xiii)) by adding ``when 
the owner's living quarters is not included in the guaranteed loan'' at 
the end of the paragraph. This change also makes this provision 
consistent with the change to Sec.  5001.103(c)(1).
    Seventh. The Agency modified Sec.  5001.103(b)(2)(xv) by replacing 
``with certain restrictions'' with ``with Agency-approved 
restrictions'' so that this paragraph reads: ``housing development 
sites with Agency-approved restrictions.''
    Eighth. The Agency added five additional uses and purposes for 
which guaranteed loan funds could be used as follows:
     Mixed use commercial and residential buildings on a pro-
rata basis (residential real estate use portion not eligible);
     Operating lines of credit that are part of an overall 
guaranteed loan financing package under this section and that are used 
for certain payments (see Sec.  5001.103(b)(2)(xix));
     Leasehold improvements, provided the underlying lease 
meets the requirements specified in Sec.  5001.101(a)(1)(viii);
     The purchase of preferred stock or similar equity issued 
by a cooperative organization or a fund that invests primarily in 
cooperative organizations, if the guarantee significantly benefits one 
or more entities eligible for assistance for the purposes described in 
paragraph (d) of this section; and
     Establish and facilitate enterprises that process, 
distribute, aggregate, store, and market locally or regionally produced 
agricultural food products to support community development and farm 
and ranch income.
    The provision to allow lines of credit as an authorized use of loan 
funds, as noted above, is only available for the Business and Industry 
loan guarantee program at this time.
    Ninth. Lastly, the Agency removed proposed Sec.  
5001.103(a)(1)(xviii), assisting cooperative organizations, because 
such organizations are eligible borrowers and thus this provision is 
not required in this part of the section.
    Unauthorized projects and purposes (Sec.  5001.103(c)). The Agency 
made changes to several paragraphs.
    First. The Agency clarified the end of Sec.  5001.103(c)(1). At 
proposal, this provision read: ``Businesses housed in private homes, 
except when the pro-rata value of the owner's living quarters is 
deleted from the value of the project.'' The rule changes this to now 
read: ``Businesses housed in private homes, except when the pro-rata 
value of the owner's living quarters is not included in the guaranteed 
loan.''
    Second. The Agency recast how Sec.  5001.103(c)(2) reads, but did 
not change its effect. At proposal, this provision (Sec.  
5001.103(b)(2)) read: ``Projects in excess of $1 million that would 
likely result in the transfer of jobs from one area to another and 
increase direct employment by more than 50 employees.'' In the rule, 
this now reads: ``Any project that does not meet the requirements of 
paragraphs (d)(2), (d)(3), and (d)(4) in 7 U.S.C.,

[[Page 76711]]

Sec.  1932.'' This same change was made later in this section to Sec.  
5001.103(g)(2).
    Third. The Agency removed from the rule proposed Sec.  
5001.103(b)(3).
    Fourth. The Agency revised Sec.  5001.103(c)(4) to address 
distributions or payment to immediate family members and employee-owned 
cooperatives. At proposal, Sec.  5001.103(b)(5) read: ``Distribution or 
payment to an individual owner, partner, stockholder, or beneficiary of 
the borrower or a close relative of such an individual when such 
individual will retain any portion of the ownership of the borrower.'' 
In the rule, this provision now reads: ``Distribution or payment to an 
individual owner, partner, stockholder, or beneficiary of the borrower 
or the immediate family of such an individual when such individual will 
retain any portion of the ownership of the borrower, unless the Agency 
has determined that the distribution or payment is a part of the 
transfer of ownership within: (i) The immediate family; or (ii) an 
Employee-owned Cooperative.
    Fifth. The Agency added a new paragraph (c)(5), addressing loan 
guarantees to lending institutions, investment institutions, and 
insurance companies.
    Sixth. The Agency removed proposed Sec.  5001.103(b)(6), assistance 
to Government employees, because this is adequately covered by conflict 
of interest prohibitions.
    Seventh. The Agency added a new paragraph (c)(9) addressing loan 
funds may not be used to support inherently religious activities.
    Borrower eligibility (Sec.  5001.103(d)). The Agency added a new 
paragraph (d)(1)(v), which makes cooperative organizations housed in an 
urban area eligible provided certain rural benefits and requirements 
are met.
    Additional borrower requirements (Sec.  5001.103(e)). This is a new 
paragraph added as a result of the 2008 Farm Bill. This provision adds 
a requirement for borrowers with projects that establish and facilitate 
enterprises that process, distribute, aggregate, store, and market 
locally or regionally produced agricultural food products to support 
community development and farm and ranch income.
    Additional application process requirements (Sec.  5001.103(f)). 
Two changes were made under this paragraph.
    First. Proposed Sec.  5001.103(d) would have obligated funds using 
a priority scoring system if funds were insufficient to cover all 
applications pending approval. The Agency would also have established a 
scoring priority system each year for publication in the Federal 
Register. In the interim rule, the Agency has replaced this method for 
determining which applications pending approval would be funded (when 
there are insufficient funds to cover all applications pending 
approval) based on the date and time a complete application is 
received, with first priority going to those complete applications 
received first.
    Second. In response to the 2008 Farm Bill, a new paragraph has been 
added (Sec.  5001.103(f)(2)) in which the Agency in making or 
guaranteeing a loan for projects that establish and facilitate 
enterprises that process, distribute, aggregate, store, and market 
locally or regionally produced agricultural food products to support 
community development and farm and ranch income will give priority to 
projects that have components benefiting underserved communities.
    Additional application documentation provisions (Sec.  
5001.103(g)). The Agency added two new provisions to this paragraph.
    First. The Agency added a new paragraph (g)(1)(iii) addressing the 
requirement for intergovernmental consultation comments to be submitted 
in accordance with 7 CFR part 3015, subpart V, of this title.
    Second. The Agency added a new paragraph (g)(2) addressing 
simplified applications. This paragraph allows lenders to submit 
applications in accordance with Sec.  5001.12(b) for loan guarantees of 
$400,000 or less.
    Additional origination responsibilities (Sec.  5001.103(h)). The 
Agency has added four paragraphs concerning additional origination 
responsibilities and removed one proposed paragraph as described below.
    First. The Agency added paragraph (h)(1) on financial statements to 
this section. This paragraph requires consolidated financial statements 
for variable interest entities in accordance with the Financial 
Accounting Standards Board financial interpretation 46, Consolidation 
of Variable Interest Entities, and eliminating intercompany 
transactions.
    Second. The Agency added paragraph (h)(2)(ii) on leasehold interest 
as collateral to this section. This paragraph allows the use of 
leasehold interest as collateral subject to approval by the Agency 
provided the leasehold interest meets the requirements specified in 
Sec.  5001.101(a)(1)(viii).
    Third. The Agency has added paragraph (h)(2)(iii) for the 
discounting of collateral to this section. This paragraph identifies 
requirements to be followed when discounting collateral for this 
program. These requirements are specified in paragraphs (h)(2)(iii)(A) 
through (E) of this section.
    Fourth. The Agency added paragraph (h)(3) on payment and 
performance bonds to this section. This paragraph requires a payment 
and performance bond sufficient to mitigate Agency risk if the project 
is never completed.
    Fifth. The Agency removed proposed Sec.  5001.103(e)(1), which 
addressed audited financial statements, because the rule now contains 
the financial statements requirements in subpart A for all of the 
programs included in the rule. Thus, this proposed paragraph is not 
required in this section.
    Additional servicing requirements (Sec.  5001.103(i)). The Agency 
added this paragraph, which addresses repurchases. This paragraph 
states: ``Repurchased loans may be sold without recourse to third-party 
private investors.''
    Additional guarantee- and loan-related requirements (Sec.  
5001.103(j)). The Agency added two new paragraphs and revised three 
proposed paragraphs as described below.
    First. The Agency added paragraph (j)(1) addressing marginal or 
substandard loans to this section. This paragraph states: ``It is not 
intended that the guarantee authority will be used for marginal or 
substandard loans or for the relief of lenders having such loans.''
    Second. The Agency added paragraph (j)(3) addressing five 
conditions for lines of credit, which are found in paragraphs (j)(3)(i) 
through (v) of this section.
    Third. The Agency has added a condition under which it may issue 
the Loan Note Guarantee prior to all planned property acquisition 
having been completed and all development having been substantially 
completed in accordance with plans and specification. This provision is 
found in paragraph (j)(4) of this section.
    Fourth. The Agency revised paragraph (j)(5) (paragraph (g)(3) at 
proposal) to specify that the funding limits are to be applied on a per 
borrower basis. At proposal, individual borrowers could have obtained 
guaranteed loans totaling more than $25 million (or $40 million, if a 
cooperative). In addition, the Agency removed reference to ``under this 
section'' in paragraphs (j)(3), (j)(3)(i), and (j)(3)(ii). Lastly, the 
Agency added a provision under which the maximum principal amount of 
$40 million may be made to cooperative organizations. As proposed, the 
$40 million limit would apply to rural projects processing value added 
commodities (proposed Sec.  5001.103(g)(3)). In the interim rule, this 
maximum amount can now be

[[Page 76712]]

applied to a project that ``significantly benefits one or more entities 
eligible for assistance for the purposes described in paragraph (d) of 
this section.'' This provision was added as required by the 2008 Farm 
Bill.
    Fifth. Because low documentation applications were dropped from the 
rule, the Agency has simplified the maximum loan guarantee percentages, 
which now apply equally to both approved and preferred lenders. There 
have been no changes to the maximum percent guarantees and loan 
amounts.
Rural Energy for America Program (Sec.  5001.104)
    Project eligibility (Sec.  5001.104(a)). The Agency has added the 
requirement that the project be located in a rural area in order to be 
eligible (Sec.  5001.104(a)(3)). The Agency also revised paragraph 
(a)(1) by removing the word ``project'' from the end of the paragraph, 
so that it now reads, in part, ``or to make energy efficiency 
improvements.'' The Agency has added a provision (Sec.  5001.104(a)(4)) 
that would enable a project to include the refinancing of any loan when 
the Agency determines that the project is viable and equal or better 
rates or terms are offered provided that the debt being refinanced will 
be less than 50% of the new loan amount.
    Additional application process requirements--obligation of funds 
(Sec.  5001.104(c)). As for the Business and Industry program, proposed 
Sec.  5001.104(c) would have obligated funds using a priority scoring 
system if funds were insufficient to cover all applications pending 
approval. The Agency would also have established a scoring priority 
system each year for publication in the Federal Register. In the 
interim rule, the Agency has replaced this method for determining which 
applications pending approval would be funded (when there are 
insufficient funds to cover all applications pending approval) based on 
the date and time a complete application is received, with first 
priority going to those complete applications received first.
    Additional application documentation provisions (Sec.  
5001.104(d)). The Agency made several modifications to this paragraph 
as described below.
    First. The Agency made two changes to the technical report 
requirement (Sec.  5001.104(d)(2)):
     The $200,000 threshold in the interim rule is to be based 
on total eligible project costs, whereas at proposal this threshold was 
based on the size of the loan guarantee being sought.
     In the interim rule, the lender is to submit the technical 
report ``to the Department of Energy (DOE) for review unless otherwise 
stated in a Federal Register Notice.'' This replaces the proposal 
language that discussed, in part, approval by the DOE and the submittal 
of a DOE technical report.
    Second. For energy assessments and audits (Sec.  5001.104(d)(3)), 
the interim rule makes clear that the lender is to submit energy 
assessments and audits to the Agency for review. This direction was not 
included in the proposed rule.
    Third. The Agency has clarified that the feasibility study is 
required for renewable energy system projects, and not for all 
projects, as would have been the case under the proposed rule, seeking 
a loan guarantee greater than $200,000 (Sec.  5001.104(d)(4)).
    Fourth. The Agency added a new paragraph (d)(5) addressing the 
requirement for intergovernmental consultation comments to be submitted 
in accordance with 7 CFR part 3015, subpart V, of this title.
    Additional origination responsibilities (Sec.  5001.104(e)). The 
Agency has added this paragraph, which contains three requirements. 
These three requirements parallel those in the Business and Industry 
program.
    First. The Agency added a paragraph on financial statements 
(paragraph (e)(1) of this section). This paragraph requires 
consolidated financial statements for variable interest entities in 
accordance with the Financial Accounting Standards Board financial 
interpretation 46, Consolidation of Variable Interest Entities, and 
eliminating intercompany transactions.
    Second. The Agency added a paragraph on discounting collateral 
(paragraph (e)(2) of this section). This paragraph requires the 
discounting collateral for this program in accordance with the 
provision found in Sec.  5001.103(h)(2)(iii).
    Third. The Agency added a paragraph on payment and performance 
bonds (Sec.  5001.104(e)(3)). This paragraph requires a payment and 
performance bond sufficient to mitigate Agency risk if the project is 
never completed.
    Additional guarantee- and loan-related requirements (Sec.  
5001.104(g)). The Agency has made a number of revisions to this 
paragraph, several of which were made in response to requirements in 
the 2008 Farm Bill. These revisions are described below.
    First. The Agency clarified in paragraph (g)(1) that the lender 
must certify to the conditions specified in the paragraph.
    Second. In response to the 2008 Farm Bill, the Agency added to this 
section paragraph (g)(2)(i), which establishes the maximum loan amount 
under this program at $25,000,000 and applies this limit on a per 
borrower basis.
    Third. In response to the 2008 Farm Bill, the Agency added to this 
section paragraph (g)(2)(ii), which lays out seven criteria that the 
Agency will take into account in determining the amount of a loan 
guarantee under this section (see paragraphs (g)(2)(ii)(A) through (G) 
of this section).
    Fourth. In response to the 2008 Farm Bill, the limit on matching 
funds has been raised from 50% to 75% (see paragraph (g)(3) of this 
section).
    Fifth. The Agency clarified that, while professional service fees 
are considered part of eligible project costs, packager fees and broker 
fees are not eligible project costs (see paragraph (g)(3)(v) of this 
section).
    Sixth. The Agency replaced ``permanent working capital'' with 
``working capital'' in the list of eligible project costs (see 
paragraph (g)(3)(x) of this section).

Discussion of Comments

    The proposed rule was published in the Federal Register on 
September 14, 2007 (72 FR 52618), with a 60-day comment period that 
ended November, 13, 2008. Comments were received from 55 commenters, 
yielding over 800 individual comments on the proposed rule, which have 
been grouped into similar comments. Commenters included Rural 
Development personnel, attorneys, financial institutions, trade groups, 
lender associations, and individuals. Most of the comments that the 
Agency judged to have merit have resulted in changes in the rule. There 
are also responses to many of the comments where the Agency has 
indicated that it will provide additional guidance in the handbook to 
the rule. The Agency sincerely appreciates the time and effort of all 
commenters. Responses to the comments on the proposed rule are 
discussed below.

General

    Comment: Nine commenters stated that they ``commend'' or 
``support'' USDA in proposing a unified guaranteed loan platform for 
its existing guaranteed loan programs.
    Response: The Agency appreciates the commenters' support of the 
proposed platform.
    Comment: In expressing their general opposition to the proposed 
rule, nine commenters stated that, if adopted as proposed, the rule 
would be the final step in getting the Agency out of the guaranty loan 
business and its mandate to create and preserve American jobs,

[[Page 76713]]

because the Agency will have no lenders left participating in its 
programs.
    One commenter noted that the proposed rule is much more restrictive 
than the current regulations and that, if this rule is implemented, the 
Agency will lose the support of the lenders, particularly because of 
the requirement that lenders use the more restrictive of lender's loan 
policy or program regulations.
    Response: The Agency has made revisions to the rule in response to 
specific comments that address the general concerns of these 
commenters. For example, the rule does not require lending entities 
that wish to participate in the guaranteed loan programs included in 
this rule to submit copies of their loan origination policies and 
procedures, but instead a summary of those policies and procedures. As 
another example, the Agency reinstituted the current policy that the 
unguaranteed portion of the loan will neither be paid first nor given 
any preference or priority over the guaranteed portion.
    The Agency disagrees with the commenter that the requirement for a 
lender to comply with its own policies and procedures where those are 
more stringent than those in the rule will result in a lender being 
more or less inclined to participate in the loan guaranteed programs 
included in this rule. Where a rule provision is more stringent than a 
lender's particular corresponding loan origination or servicing policy 
or procedure, the Agency understands that such a lender may be more 
inclined not to participate. However, the Agency believes that in such 
instances it is necessary to require compliance with the rule's more 
stringent policy or procedure, unless otherwise approved by the Agency, 
in order to manage risk.
    Comment: One commenter stated that, as proposed, the requirements 
are too burdensome and serve no practical utility in eliminating 
project risk, borrower risk, or loan guaranty risk. This commenter also 
stated that, as proposed, the rule serves no practical utility to the 
Agency in making rural development guaranteed loan decisions, and 
increases the Agency's administration of the program rather than 
concentrating on rural economic development.
    Response: The Agency agrees with the commenter that the proposed 
rule had provisions that were unnecessarily burdensome and perhaps 
provided limited benefits. The Agency has revised the rule to 
incorporate many suggestions made by commenters. Under the interim 
rule, the Agency is requesting the minimum amount of information 
necessary to suitably evaluate risk. For example, rather than 
requesting copies of a lender's policies and procedures, the Agency is 
requesting that the lender provide a summary of its policies and 
procedures. In addition, the Agency is implementing a preferred lender 
program for Business and Industry guaranteed loans that further reduces 
lender burden and Agency staff time on such loan applications. Further, 
the preferred lender program in the rule has more tangible benefits to 
the lender. With these and other changes made throughout the rule, the 
Agency does not believe that the provisions of the rule will impose 
undue financial hardship or unattainable eligibility requirements for 
lending entities wishing to participate in the loan guaranteed programs 
included in this rule.
    Lastly, the Agency's goal is to better manage and reduce the risks 
discussed in the rule, not eliminate them as suggested by the 
commenter, from current program practices. To this end, the Agency 
believes that the rule achieves this goal.
    Comment: One commenter stated that the Agency's Rural Development 
loan programs included in the proposed rule have a mission to create 
jobs and stimulate rural economies. According to the commenter, most of 
the proposed rule would impose undue financial hardship or unattainable 
eligibility requirements, making them ineligible projects.
    Response: The Agency does not believe that the provisions will 
impose undue financial hardship or unattainable eligibility 
requirements. In addition, in response to specific comments that 
suggest reduction of unnecessary financial hardships and eligibility 
requirements, the Agency has made appropriate adjustments to the rule. 
For example, the Agency has revised the definition of debt coverage 
ratio to reflect its calculation on the basis of a typical year for the 
project. This reduces the eligibility issue for startup businesses and 
those that might experience hardships during economic downturns. The 
Agency has also removed the proposed equity requirement and replaced it 
with debt-to-tangible net worth ratio, a more useful and practical 
eligibility requirement.
    Comment: One commenter stated that he did not see an improvement 
with offering a unified guarantee loan platform, especially from the 
lenders' perspective. In the commenter's opinion, the complaint of 
inconsistency from the Agency is overblown by a very few lenders who 
cross state lines and program lines. According to the commenter, having 
the guaranteed loan program regulations located in one series (7 CFR 
part 5001) will be handy for Agency staff but doubts that the lending 
community will really care or appreciate the effort.
    Response: The Agency believes that having these guaranteed loan 
programs under one series (i.e., 7 CFR part 5001) will be useful to 
both Agency staff and lenders. It is the Agency's experience that there 
are a number of lenders currently participating in these guaranteed 
loan programs that cross state lines. This rule would expand the number 
of programs that these lenders can offer. Thus, the Agency believes 
there are tangible benefits to this platform that lenders will 
appreciate.
    Comment: One commenter stated that the proposed rule fails to 
address what the commenter characterized as a ``lender- and borrower-
unfriendly atmosphere (us against them)''.
    Another commenter stated that the Agency should look at financial 
institutions as partners in a worthwhile endeavor, and that the 
proposed changes will seriously diminish that partnership and will 
drive lenders away from the program.
    Response: The goal of the rule is to strengthen the partnership 
between the Agency and its lenders and borrower partners by 
streamlining the regulatory requirements of the guaranteed loan 
programs included in the rule. In addition, in preparing the rule, the 
Agency has accepted numerous comments from program stakeholders to 
further strengthen this relationship.
    Comment: One commenter stated that the Business and Industry 
program must leverage the skill and delivery systems that already exist 
within the commercial bank lending community of this country and that 
the key is to develop a sound and measurable approval process for 
lenders that includes (among other things) minimum capital, minimum 
reserves, qualified personnel, risk rate management, documentation and 
delinquency review, underwriting supervision, and historical review for 
continued authority.
    Response: The Agency agrees with the commenter and has accepted 
many of the lender's comments to ensure that this rule is consistent 
with business practices of the commercial lending community for the 
Business and Industry program and all of the programs associated with 
this rule's guaranteed loan platform.

[[Page 76714]]

    Comment: Five commenters stated that the Agency should address the 
current problems with the slow delivery system of the guaranty programs 
(minimum 1 month, but usually much longer). The commenters stated that 
these issues result in borrowers and/or lenders declining to be 
involved in the guaranty programs because the timeframes for turnaround 
and the variance in requirements are not realistic in today's world. 
Two of these commenters stated that they do not believe the rule, as 
proposed, does enough to address the slow delivery system. One 
commenter suggested that a better program for lenders, especially for 
Business and Industry lenders, would include streamlining the process 
to make sure the Agency can deliver the guarantees in a very timely 
basis.
    One of the commenters suggested that the Agency mandate approval 
time for loan approval and servicing actions, as the Small Business 
Administration (SBA) did years ago.
    Response: One of the goals of this regulatory process is to develop 
a better balance between the needs of the Agency to provide proper 
oversight over the loan guarantee programs versus the needs of our 
lender partners for rapid loan guarantee decisions. In response to this 
and other comments, the Agency has revised the rule to further reduce 
the burden on lenders and the Agency to address only those areas 
necessary to properly manage risk associated with the programs. For 
preferred lenders, the rule now commits the Agency to act on loan 
applications from preferred lenders within 10 working days of the 
receipt of a complete loan guarantee application. Lastly, the Agency 
notes that, through this new platform, the paperwork burden for this 
program has been reduced by approximately 25 percent.
    Comment: One commenter stated that the proposal retains the current 
limited delegated lending authority. According to the commenter, there 
is no value to requiring lenders to submit origination and servicing 
policies, provide monthly reports on loans in default, and provide 
notification within 5 days of any loan agreement violation, because 
these further restrict a lender's ability to manage these loans. The 
commenter recommended using the SBA's Preferred Lender Program as a 
guideline to expand delegated lending authority.
    Response: In response to this and other related comments, the 
Agency has revised the rule to provide more tangible benefits to the 
lender by:
    (1) Requiring lending entities seeking to participate in the 
guaranteed loan programs included in this rule to submit summaries of 
their loan origination and servicing policies and procedures,
    (2) Providing monthly reports on loans that are in monetary default 
(rather than any kind of default as was proposed), and
    (3) Providing notification of loan agreement violations within 15 
calendar days (rather than 5 days as was proposed).
    Finally, the Agency reviewed several other loan guarantee programs, 
including those for the SBA and for the Farm Services Agency (FSA). The 
Agency determined that the FSA loan guarantee program had features more 
appropriate for this rule and has adopted a number of the FSA program 
features for this rule.
    Comment: One commenter stated that the delivery system that is so 
unique to the Agency, that has been so successful in the past, and that 
is envied by so many within government is being substantially 
abolished. The commenter also stated that local outreach, information, 
and accountability would become practically nonexistent.
    Response: The Agency agrees that its delivery system provides 
extraordinary service to our rural customers. The Agency believes that 
the adoption of this rule will better empower the Agency's delivery 
system team to provide even better service in the future by enabling 
Agency staff to engage in increased program outreach and community 
development, in large measure by eliminating regulatory redundancy and 
emphasizing lender expertise.
    Comment: One commenter stated that there is no provision in the 
proposed rule for outreach to lenders, and two commenters recommended 
that the Agency participate in the National Association of Government 
Guaranteed Lenders (NAGGL) and the National Association of Development 
Companies (NADCO) to improve communication with its lenders. Another 
commenter suggested that making sure the USDA staff are well trained 
and experienced in the programs they are administering will do more for 
the program than a new platform, especially for the Business and 
Industry program.
    A fourth commenter stated that local outreach, information, and 
accountability would become practically nonexistent under the proposed 
platform.
    Response: Outreach, information, and accountability are delivered 
at the State and local level to ensure our relationship with lenders is 
maintained. At the national level, the Agency works with a variety of 
national organizations to promote the programs and to determine if 
program adjustments are necessary to better meet the needs of our rural 
customers.
    Comment: Two commenters stated that the proposed rule should 
address the current problems with the lack of uniformity in 
administration, due largely to decentralization and lack of training 
both at USDA and with lenders. One of the commenters encouraged the 
Agency to address these issues and offer a more responsive, more 
uniformly delivered, and more efficiently administered guaranty program 
that is borrower and lender friendly, but still maintains program 
integrity. The other commenter recommended that the Agency needed to 
better manage staff.
    Response: The Agency acknowledges the commenters' points and 
considers the new platform to be just the first step in achieving 
greater uniformity in its administration of the loan guarantee 
programs. In addition, after the adoption of this rule, the Agency will 
accelerate its numerous training activities to ensure uniform and 
consistent adoption of the requirements of the regulation nationwide.
    Comment: Two commenters stated that the Agency should rely more on 
the input of local offices and staff. One of the commenters stated that 
the proposed rule practically ignores grassroots participation and is 
aimed at large lenders, stating that ``local involvement is too little, 
too late'' and that local knowledge and input should be obtained as 
soon as a request is received. This commenter recommended that the 
present structure and Divisions become an integral part of the rule.
    The other commenter stated that local directors should be allowed 
to approve loans high enough to allow for reasonable loan volume. 
According to this commenter, micro-management by the Agency's central 
office makes no sense at all--let your offices perform the tasks at 
local levels--this is why you hired them.
    Response: The Agency believes that its field delivery system is 
critical to the operations of its loan guarantee activities. The 
regulation does nothing to diminish the importance of the field office 
in developing and processing loan guarantee applications. In fact, by 
eliminating unnecessary differences among the loan guarantee programs, 
the field offices will be able to spend more time in processing and 
servicing loan guarantees in these programs.
    Lastly, with regard to the comment concerning the level of loans 
that local directors can approve, certain Agency field offices 
currently have approval authority of up to $10 million. The

[[Page 76715]]

Agency believes that this level is sufficiently high and has not 
modified approval authority levels in this rule.
    Comment: One commenter stated that the Agency has attempted to 
create a Loan Specialist Accreditation Plan to help, but there is no 
implementation plan for this program nor has it been determined who is 
responsible to schedule and pay for the proposed training to the field 
specialists, the State Director or the National Office. The commenter 
stated that the skill level of the field specialists needs to be at 
least on par with the bank's commercial loan officers, so the field 
specialists can understand what the lender is doing with their loan 
analysis and why. The commenter concluded that anything less will hurt 
the Business and Industry program in quantity and quality of the 
portfolio.
    Response: The Loan Specialist Accreditation Plan is not part of 
this rule, but, at the discretion of Agency managers, may be used in 
support of Agency training associated with the implementation of this 
rule.
    Comment: One commenter suggested making each regulation self-
contained, even if it means repeating the same rules four times. The 
commenter also stated that there are simply too many differences 
between these four lending programs to make them fit into the same 
mold.
    Response: The Agency appreciates the commenter's concern and will 
use guidance material to assemble program-specific requirements for 
each of the programs included in the rule. However, as far as the rule 
itself is concerned, the Agency is retaining the subpart A and subpart 
B structure. Agency experience shows that there are more common 
elements associated with the guaranteed loan programs included in this 
rule than there are differences. Provisions for these differences are 
provided for in subpart B. Having a common platform for each of the 
guaranteed loan programs included in this rule will reduce burden for 
Agency staff, lenders, and borrowers, easing program delivery and 
improving efficiency. Grouping common elements in subpart A will assist 
lenders in managing diverse program portfolios and meeting Federal 
requirements.
    Comment: One commenter provided a suggested list of the elements 
that increase the probability of a loss, in approximate order of risk:

--Startup company,
--Management without a proven business track record,
--Company that is unprofitable or has inconsistent retained earnings or 
cash flow,
--Equity which just meets a 10% or 20% minimum threshold,
--Personal guarantees with little outside net worth,
--Collateral which is unique or remote from an urban center,
--Loan officer with no Business and Industry experience,
--Collateral coverage which is not discounted sufficiently, and
--Lending institution with no Business and Industry experience.

    Response: The Agency thanks the commenter for the input on those 
elements that contribute to risk. The Agency has taken these elements 
into consideration during the development of both the proposed and 
interim rules. The challenge in administering a loan guarantee program 
is the need to balance the interest in minimizing losses versus the 
need to take reasonable risk to promote rural development. This rule 
attempts to better balance interests by focusing on the risk management 
approach described in the proposed rule.
    Comment: One commenter recommended that the Agency centralize its 
loan process, as SBA did years ago, and, except for the differences in 
eligibility and guaranty amounts, copy SBA regulations and standard 
operating procedures (SOPs), including SBA's preferred lender program 
(it works, and most USDA lenders know it and are members). Two other 
commenters stated that USDA should ``copy'' the SBA program, which the 
commenters described as a successful program.
    Response: The Agency believes that the strength of its programs and 
program delivery systems is found in the local relationship our field 
offices develop in rural communities that we serve. To the extent that 
centralization of certain processes will improve the efficiency of the 
programs without damaging the critical local relationship, the Agency 
will centralize such processes. The centralized servicing center for 
the single family housing programs is but one example.
    In its consideration of all of the comments received on the 
proposed rule, the Agency notes that it looked at a number of other 
guaranteed loan programs, most notably SBA and FSA programs. The Agency 
has revised various portions of the rule based on the FSA program, 
which the Agency found to be more in line with the types and size of 
loans the Agency guarantees than in the SBA guaranteed loan program.
    Comment: One commenter stated that the publication of the new 1970 
Environmental Regulation is critical to the successful implementation 
of this Unified Guaranteed Loan regulation for three reasons:
    First. Currently, two separate environmental regulations will be 
used by the lenders. This will be confusing.
    Second. For large projects that may require an environmental impact 
statement (EIS), 7 CFR Sec.  1940.336 imposes upon the Agency the 
responsibility to contract and pay for the EIS which could cost 
millions of dollars.
    Third. The new 1970 environmental regulations include streamlining 
in many aspects that will make the National Environmental Policy Act 
(NEPA) process more practicable.
    The commenter stated that the 1970 regulation has been cleared by 
all Rural Development program areas and has been awaiting OGC review 
since June 2007. The commenter also recommended that every effort be 
made to expedite that review.
    Response: The environmental regulation is a critical regulation in 
the operation of USDA Rural Development programs, including the loan 
guarantee program. The Agency is currently reviewing the environmental 
regulation to determine whether it is appropriate to revise it. The 
consideration of amendments to the environmental regulation is outside 
the scope of the proposed rule. Therefore, these comments have not been 
considered in the context of the finalization of this rule.
    Comment: One commenter noted that the proposed rule indicates 
Subpart B of Part 4280 is removed and reserved. The commenter also 
noted that Section A of 7 CFR part 4280, subpart B, addresses the grant 
portion of the Agency's Renewable Energy Systems and Energy Efficiency 
Improvements Program and that no new grant regulation has been 
proposed. The commenter recommended that only Section B of 7 CFR part 
4280, subpart B, be removed and reserved, thus leaving the grant, 
direct loan, and combination financing sections in the regulation. The 
commenter also questioned whether, if this new regulation is adopted, 
subpart A of 7 CFR part 4279 and subpart B of 7 CFR part 4287 should 
also be removed and reserved?
    Response: The Agency agrees with the commenter that only Section B 
of subpart B of 7 CFR part 4280 should have been reserved and removed, 
and has made this correction. The Agency notes that the combined 
funding provisions found in Section D of subpart B of 7 CFR part 4280 
have been revised to make necessary conforming changes

[[Page 76716]]

as the result of the removal of Section B.
    Comment: Two commenters stated that in Exhibit II--Guarantee Fee 
and Loan Closing Procedure Procedures: Item (b) should include a 
statement that all conditions in the Conditional Commitment have been 
met by the lender before approving the lender's loan closing documents.
    Response: The proposed rule does not include an Exhibit II and 
therefore the Agency has not considered the comment.

Subpart A--General Provisions

Purpose (Sec.  5001.1)
    Comment: Two commenters pointed out that proposed Sec.  5001.1 
stated that this part regulates ``Rural Development guaranteed loans.'' 
The commenters stated that this is misleading because the proposed new 
part covers only four of the guaranteed loan types offered by Rural 
Development.
    Response: Although it is the Agency's intention to add the other 
guaranteed loan programs to this platform as determined by the Agency 
on a program-by-program basis at a later date, the Agency has revised 
the purpose statement to clarify that this part applies to the 
guaranteed loan programs specified in subpart B of this part.
Definitions and Abbreviations (Sec.  5001.2) Applicant
    Comment: Two commenters stated that the definition of ``applicant'' 
does not indicate whether it means the business or the lender because 
both are seeking a guarantee. One of the commenters stated that it is 
the lender who is seeking the guarantee and, therefore, the applicant 
and the lender are the same and asked why define both.
    A third commenter suggested revising the definition of applicant to 
include both persons and entities to be consistent with the Business 
and Industry and the Renewable Energy programs.
    Response: The Agency reviewed the use of the term applicant 
throughout the proposed rule and agrees that in some places the 
specific entity being referred to is unclear. The Agency decided that 
the term is unnecessary and has deleted it from the rule. In its place, 
the rule now specifies directly whether a particular requirement 
applies to the lender, the borrower, or both.
    In making this change, the Agency also revised the definition of 
``borrower'' to include a person that seeks to borrow money, which was 
referred to as a ``prospective borrower'' in the proposed rule. By 
making this change, the rule is simplified by using the term 
``borrower'' and letting the context of the rule make the 
differentiation between ``borrower'' and ``prospective borrower.''
    Finally, because the definition of applicant has been deleted, it 
becomes unnecessary to revise the definition to include ``persons.''
    Comment: One commenter recommended that the term ``prospective 
borrower'' be replaced throughout the rule with the term ``applicant'' 
when appropriate, to be consistent with the definition of applicant.
    Response: After considering this comment, the Agency agrees that 
the terminology in the proposed rule was inconsistent. In the rule, the 
Agency has elected to delete the term ``applicant'' and use the term 
``borrower.'' The Agency then redefined the term ``borrower'' to cover 
``the person that borrows, or seeks to borrow, money from the lender.'' 
The context in which the term borrower is used in the rule determines 
whether the rule is referring to the person that borrows money, or is 
seeking to borrow money, from the lender.
Approved Lender and Preferred Lender
    Comment: One commenter suggested that definitions be provided for 
the terms ``approved lender'' and ``preferred lender.''
    Response: The Agency agrees with the commenter and has added 
definitions for both terms to Sec.  5001.2 of the rule.
Business Plan
    Comment: Two commenters stated that the definition of ``Business 
plan'' should include a statement that all projected financial 
statements are to be completed by an independent certified public 
accountant in accordance with Generally Accepted Accounting Principles 
(GAAP) for all for-profit businesses. The commenters also noted that 
nonprofit corporations and public bodies should be required to obtain 
this only if the loan request exceeds $1 million.
    Response: The intent of the definition of business plan is to 
provide broad guidance as to the minimum requirements of a business 
plan. The Agency notes that not all borrowers will be able to provide 
financial statements that are prepared in accordance with GAAP, but 
that such financial statements can still be acceptable if they are 
prepared in accordance with Agency-approved guidelines. The Agency will 
identify additional guidance as to what a business plan should contain 
for each specific program in a handbook. The Agency notes that, in 
response to comments specific to financial statements, the requirements 
associated with financial statements have been modified in the rule to 
require, for borrowers that have been in existence one or more years, 
the most recent audited financial statements of the borrower, unless 
alternative financial statements have been authorized by the Agency, if 
the guaranteed loan is $3 million or more, or the most recent audited 
or Agency-acceptable financial statements of the borrower if the 
guaranteed loan is less than $3 million. If the borrower has been in 
existence for less than one year, the rule requires the most recent 
Agency-authorized financial statements of the borrower regardless of 
the amount of the guaranteed loan request. Therefore, the Agency has 
not revised the definition of business plan in response to this 
comment.
    Comment: One commenter stated that the definition of ``Business 
plan'' is too specific. The commenter stated that, with loans ranging 
from several hundred thousand dollars to tens of millions of dollars 
the requirements for business plans, the definition should be 
reasonably general to allow the borrower and lender to achieve 
reasonableness depending on the project.
    Response: The Agency does not agree with the commenter that the 
definition of business plan is too specific. The definition is intended 
to identify the requirements that constitute a minimal business plan 
that would be adequate for the smallest projects where one is required. 
For larger, more complex projects, the Agency and/or the lender may 
require a more detailed business plan. Therefore, the Agency has not 
revised the definition of business plan in response to this comment.
    Comment: One commenter noted that the definition of ``Business 
plan'' calls for description of the ``applicant's'' ownership 
structure, etc., and commented that, by definition, this would be in 
reference to the lender (``The entity that is seeking a loan guarantee 
under this part.'') rather than the borrower. The commenter suggested 
that ``applicant'' be replaced by ``borrower.''
    Response: The Agency agrees with the commenter that, as the 
proposed rule defined applicant, this would refer to the lender when in 
fact this requirement should apply to the ``potential borrower.'' The 
Agency has revised the definition to indicate that this requirement 
applies to the borrower and not the lender.

[[Page 76717]]

Cash Equity
    Comment: Twelve commenters commented on the need for a definition 
of cash equity. Commenters stated that the proposed rule did not 
provide a definition of cash equity and that a definition needs to be 
fully and carefully defined.
    One commenter expressed concern that without a clear definition, 
the public could not effectively comment on the rule and stated that 
the point in time of its measurement should also be established. 
Another commenter added that depending on how cash equity is defined 
and the timing in the year, this could be a challenge for even strong 
businesses to meet.
    Three commenters wondered if by cash equity, the USDA meant cash 
contribution.
    One commenter suggested the cash equity could be 10% down payment, 
or define equity as the owner's interest in a building based upon the 
appraised value.
    Response: As noted elsewhere in response to comments on the 
financial criteria associated with project eligibility, the rule does 
not contain a ``cash equity'' criterion (cash equity has been replaced 
with debt-to-tangible net worth ratio). Therefore, it is unnecessary to 
define ``cash equity'' because that term is no longer used in the rule.
Conflicts of Interest
    Comment: One commenter stated that the definition of ``Conflicts of 
interest'' needs to be revised because, as written, it makes inter-
family transfers of ownership ineligible.
    Response: In response to a similar comment made by this commenter 
on proposed Sec.  5001.103(b)(5) concerning unauthorized projects and 
purposes, the Agency has revised the rule to allow for inter-family 
transfers of ownership (see Sec.  5001.103(c)(4) in the rule). The 
Agency believes that this addresses the commenter's concern both on 
proposed Sec.  5001.103(b)(5) and on the proposed definition of 
conflicts of interest, and the Agency does not believe it is necessary 
to modify the definition of conflicts of interest. However, the Agency 
has decided not to include a definition of conflicts of interest in the 
rule and will instead provide guidance in a handbook on what the Agency 
considers to be conflicts of interest or appearances of conflicts of 
interest.
Cooperative Organization
    Comment: One commenter stated that, by not including true 
cooperatives as part of the definition of ``Cooperative organization'', 
true cooperatives are no longer eligible entities for the Business and 
Industry program.
    Response: The Agency agrees with the commenter that the proposed 
rule would have excluded true cooperatives as eligible entities and 
this was not the Agency's intention. Therefore, the Agency has revised 
the definition of cooperative organization to include true 
cooperatives.
Debt Coverage Ratio
    Comment: One commenter stated that debt coverage ratio needs to be 
defined. Another commenter stated that the proposed definition is vague 
and that, if USDA uses the ``net operating income'' criteria, the 
minimum coverage ratio of 1.0 is a very high requirement and may result 
in the exclusion of some very worthwhile projects.
    Two other commenters stated that the proposed definition needs to 
be revised to conform to normal banking practice and that non-cash 
expenses (e.g., depreciation) and debt service expenses (e.g., 
interest) should be added back to net operating income. One of these 
commenters suggested that debt coverage ratio should be defined as 
``the ratio obtained when dividing a business's realistically-projected 
Earnings Before Interest, Taxes, Depreciation (and depletion for 
natural resource companies), and Amortization (EBITDA) by its annual 
debt service (principal and interest) on all loans of the business.'' 
This commenter noted that EBITDA is a clearly, widely-used and well-
understood term in the banking industry. The other commenter offered a 
similar definition of ``a comparison of the company's cash flow, 
measured as EBITDA to the required debt service (principal and interest 
payments).'' This commenter stated that they prefer this standard 
industry definition over the definition that compares net operating 
income to the principal and interest requirements.
    Response: The Agency agrees that the definition of debt coverage 
ratio needs to be revised and agrees with the commenters who suggested 
that the definition more conform to normal banking practice. Therefore, 
the Agency has incorporated the concept of EBITDA into the definition 
of debt coverage ratio in the rule.
Environmental Review
    Comment: One commenter suggested adding a definition for 
``Environmental review'', as follows: ``An analysis, as required by The 
National Environmental Policy Act (NEPA), of potential environmental 
impacts likely to result from the implementation of a proposal. This is 
documented by the appropriate report in the form of a: Categorical 
Exclusion (CE), Environmental Assessment (EA), or Environmental Impact 
Statement (EIS)''.
    Response: The rule contains sufficient guidance as to what is 
expected for an environmental review. Thus, the Agency does not believe 
it is necessary to create a definition for environmental review.
Essential Community Facility
    Comment: One commenter questioned the meaning of the phrase ``Not 
include a project that benefits a group of single individuals as 
opposed to a class within a community'' in paragraph (iii) of the 
proposed definition of ``Essential community facility.'' The commenter 
stated that a list of some examples of projects that are being referred 
to should be included.
    Response: The Agency agrees with the commenter that the meaning in 
paragraph (iii) of the proposed definition was not clear. In the rule, 
the Agency has revised this paragraph to read ``benefit the community 
at large.'' The intent is that the project not benefit a specific 
individual or a uniquely defined set of individuals within the 
community. The Agency will provide additional guidance, including a 
list of examples, in a handbook for the rule.
    Comment: Two commenters suggested that paragraph (vi) of the 
proposed definition of ``Essential community facility'' be expanded to 
state: ``Be located in and provide service to a rural community''.
    Response: The Agency disagrees that it is necessary to modify the 
referenced paragraph to include ``provide service to a rural 
community.'' The introductory paragraph to this definition already 
states that the resulting service is to be provided to ``primarily 
rural residents.'' The Agency notes that in the rule the subject 
paragraph has been removed from the definition and placed in subpart B 
as a specific project eligibility criterion, where the Agency believes 
it is more appropriately addressed.
High Impact Business
    Comment: One commenter noted that the definition of ``high-impact 
business'' could reasonably be construed to include a day-spa, an art 
store, or some other small business creating few jobs. The commenter 
stated that the Agency has developed the Socio-Economic Benefit 
Assessment System measurement tool, which can estimate a project's 
impact in terms of job creation, tax base increases, and gross domestic 
product, and recommended that ``high-impact'' be redefined in these 
terms

[[Page 76718]]

versus the vague generality currently adopted.
    Response: The Agency agrees that the types of businesses described 
by the commenter should not be considered ``high impact businesses'' as 
intended under this rule. The Agency, therefore, has revised the 
definition of high impact business to include reference to jobs with an 
average wage exceeding 125% of the Federal minimum wage. The Agency 
does not believe it is necessary to incorporate the metrics proposed by 
the commenter (e.g., tax base increases) to appropriately define high 
impact businesses.
Lender's Agreement
    Comment: One commenter stated that the lender's agreement should be 
referred to as a form and not as an agreement.
    Response: The Agency agrees with the commenter and has made the 
suggested edit.
Loan Agreement
    Comment: One commenter noted that the definition of ``loan 
agreement'' refers to an Agency approved agreement and asked what the 
process is to approve a loan agreement.
    Response: The process used by the Agency to approve a loan 
agreement is internal to the Agency and it is inappropriate to include 
internal procedures in the rule. The Agency will make clear the process 
in a handbook to this rule or in other internal guidance material.
Loan Note Guarantee
    Comment: One commenter stated that a Loan Note Guarantee should be 
referred to as a form, not an agreement.
    Response: The Agency agrees with the commenter and has made the 
suggested edit.
Negligent Loan Origination
    Several commenters expressed concerns with the second paragraph of 
the proposed definitions of negligent loan origination and negligent 
loan servicing, which states the failure of the lender to perform its 
origination or servicing responsibilities in accordance with the 
origination or servicing policies and procedures in use by the lender.
    Comment: One commenter suggested revising the definition of 
``negligent loan origination'' to rephrase the ambiguous phrase ``at 
the time of the loan'' with ``at the time the loan is made.''
    Response: The Agency agrees with the commenter and has made the 
suggested edit.
    Comment: One commenter stated the proposed rule creates unpublished 
program eligibility guidelines and standards for loan origination and 
servicing for lenders. The Agency proposed to use unpublished 
origination standards, credit policies, and procedures of each lender 
that are unavailable to other lenders as a new standard. According to 
this commenter, this requirement places a dual, unfair, and undue 
burden on the lender. The commenter stated that the Agency proposes 
double, unpublished standards and procedures that are burdensome to 
lenders, mandating that lenders use their own credit policies or 
procedures if more stringent than the Agency's.
    Elsewhere, the commenter stated that the Agency is proposing to 
hold lenders to three standards--a reasonable prudent lender, the 
lender's own credit policies and procedures, and acts and omissions 
standards. The commenter concluded that, combined, they are confusing, 
overly burdensome, and difficult to administer.
    Response: The Agency believes that the commenter misunderstands the 
intention of the Agency. Each lender will, as is currently their 
practice, be using its own policies and procedures in underwriting a 
loan for Agency guarantee and need not be concerned with those of 
another lender. Thus, lenders will have full knowledge of the 
requirements necessary under this rule for submitting an application 
for loan guarantee.
    Further, the Agency would expect a lender's policies and procedures 
to be consistent with a ``reasonable prudent lender'' standard, which 
would include acts and omissions standards. Therefore, the Agency 
disagrees with the commenter's conclusion that this rule and the 
lender's own policies and procedures would be confusing, overly 
burdensome, or difficult to administer. If the lender has any questions 
on the implementation on this issue, then they can seek Agency 
guidance.
    Comment: One commenter stated that, as proposed, the rule would 
create unpublished eligibility metrics by including lender credit 
policies and procedures if those procedures are more stringent than 
published procedures and that it is unreasonable to use those policies, 
if stricter than the Agency's published standards, as unpublished 
credit, project eligibility, loan terms, or servicing standards not 
otherwise made available to the public. According to the commenter, 
this is unfair to borrowers, such as small businesses, because a 
borrower will have no knowledge as to how to become eligible and a 
borrower working with a lender with a stricter credit policy than the 
Agency's standard will not know that their project could possibly 
qualify with another Agency approved lender. Further, this requirement 
creates an unfair standard for projects by discriminating against 
projects that would qualify under one prudent lender with less 
stringent credit policies and procedures.
    Response: While the Agency does not disagree with the commenter's 
concern, the Agency points out that this rule is intended to define the 
relationship between the lender and the Agency in order for the Agency 
to guarantee the loan presented to it by the lender. It is not the 
intent of this rule to lay out one set of conditions that all loans 
would be approved under, which is no different from the current 
situation that a borrower faces. In other words, a borrower seeking a 
loan will not know the various conditions required by one lender or 
another. This rule does not change that situation. If a borrower works 
with a lender who cannot qualify the loan under that lender's policies 
and procedures, the borrower is always free to work with another 
lender.
    Comment: One commenter stated that the proposed unpublished 
standards go beyond current USDA Rural Development regulations and are 
onerous and unreliable for all lenders to equally comply to and be held 
accountable for.
    Response: The Agency has intentionally set out to develop a new 
regulatory platform for administering its loan guarantee programs. In 
developing this platform, the Agency has implemented provisions that 
are different from the current programs being included in this rule. 
Thus, to the extent that this rule results in different and new 
requirements than current program regulations, this is intentional.
    With regard to the concept that the rule established 
``unpublished'' standards, the Agency considers this a matter of 
perspective. The Agency has elected to lay out a framework for 
originating and servicing guaranteed loans that relies more on the 
lender's own policies and procedures than on the Agency setting, or 
trying to set, one comprehensive standard that would apply to each of 
the included programs. To the extent that lenders have different loan 
origination and servicing standards, then the Agency understands the 
perspective that those policies and procedures are ``unpublished''; at 
least in the sense that they are not spelled out in a Federal Register 
notice or in the Code of Federal Regulations.
    However, the Agency does not believe this to be a critical issue in 
the successful implementation of its

[[Page 76719]]

guaranteed loan programs. Each lender that is approved for 
participation in this program will know both its own policies and 
procedures and those that are spelled out in the rule. Thus, the Agency 
does not agree that this results in a rule that is either ``onerous'' 
or ``unreliable'' to each lender.
    Comment: One commenter stated that the proposed rule contains no 
credit or loan servicing standards that are not already found in the 
current regulations.
    Response: The Agency believes that the rule contains the necessary 
elements for guaranteeing loans. In the absence of specific suggestions 
or recommendations from the commenter associated with this topic, the 
Agency cannot be more specific in its response.
    Comment: One commenter stated that the proposed rule does nothing 
to eliminate the inefficiencies and inconsistencies that the Agency 
currently acknowledges exist in the programs.
    Response: The Agency disagrees with the commenter. The Agency 
believes that developing a single platform for the delivery of these 
guaranteed loan programs improves the efficiency with which the Agency 
can deliver the programs and allows the Agency to reduce any 
inconsistencies across Agency offices.
    Comment: One commenter disagreed with the third paragraph of the 
proposed definitions for negligent loan origination and negligent loan 
servicing for dealing with the inclusion of acts and omissions to act. 
According to the commenter, the prudent lender standard in the first 
paragraph of the proposed definition should prevail as in the current 
regulation.
    Response: The third paragraph is not intended to narrow the 
requirement of the first paragraph, but rather is intended to include 
the notion of failure to act in addition to actual acts performed. As 
such, the Agency does not accept this comment.
Participation
    Comment: One commenter stated, with regard to defining 
participation, that no participations will occur under the program 
because the new rule would preclude selling participations under the 
regulations due to the fact that the Agency requires no pari passu.
    Response: The Agency has reinstated the concept of pari passu in 
the rule.
Permanent Working Capital
    Comment: One commenter stated that, in the definition of 
``Permanent working capital,'' the word ``liquid'' should be replaced 
with ``current.''
    Response: The Agency has removed the definition of ``permanent 
working capital'' from the rule because the term is no longer used. In 
its place, the Agency is using the term ``working capital.''
Preliminary Engineering Report
    Comment: One commenter noting that the definition of ``Preliminary 
engineering report'' is pertinent to the Water and Waste Disposal 
guaranteed loan program, there should also be a definition of a 
``Preliminary architectural report'' for the Community Facilities 
guaranteed loan program.
    Response: The Agency agrees with the commenter and has provided a 
definition of ``preliminary architectural report.''
Promissory Note
    Comment: One commenter recommended that the words ``or on demand'' 
be deleted from the definition of ``promissory note,'' because 
guaranteeing a demand note can create a balloon payment, which is not 
allowed under the Business and Industry program.
    Response: The Agency agrees with the commenter and has made the 
suggested edit. The Agency notes that, because of potential 
considerations on this edit with regard to acceleration, the Agency 
will provide guidance on this definition and change relative to the 
acceleration of loans in the handbook to the rule.
    Comment: One commenter noting that ``bonds'' are included within 
the definition of ``promissory note'' in the proposed rule and can be 
the guaranteed instrument, suggested clarifying that a ``lender'' is 
the entity providing the debt financing, regardless of whether they are 
making a traditional loan or providing investment (``bond'') financing.
    Response: The Agency agrees with the commenter that further 
clarification that a lender is the entity providing the debt financing 
is needed. However, the clarification is more appropriately addressed 
outside of the rule and the Agency will address this issue in the 
handbook to the rule.
Rural or Rural Area
    Comment: One commenter stated that the proposed definition of 
``rural or rural area'' includes Census Designated Places (CDPs), which 
are not part of the Consolidated Farm and Rural Development Act 
definition contained in Sec.  343(13)(A)(i) and (ii).
    Response: While the Agency would be able to include CDPs in the 
definition of rural or rural area as it applies to the Business and 
Industry and the Rural Energy for America programs even though CPDs are 
not part of the Consolidated Farm and Rural Development Act, the Agency 
agrees that CDPs are not required to be part of the definition of rural 
or rural area for these two programs. Therefore, the Agency has removed 
reference to CDPs in the definition of rural or rural areas for these 
two programs. The Agency notes that for both Community Facilities and 
Water and Waste Disposal Facilities, reference to CDPs in the rural or 
rural area definition remains in the rule.
Small Business
    Comment: One commenter noted that, under the current program 
regulations, there is no definition of ``small business'' or size 
standards. According to the commenter, the proposed rule excludes, by 
implication, those businesses that exceed SBA size limitations, such as 
publicly traded companies or other large private entities. The 
commenter recommended that the definition of small business should be 
excluded from the defined terms under the program because it implies 
limiting the size of business entities that may be eligible to 
participate in the program.
    Response: The rule keeps the definition of small business because 
it is a statutory requirement for the Rural Energy for America Program 
guaranteed loan program (as that program applies to rural small 
businesses). The Agency notes that the term applies only to this 
program and not to the other programs and does not limit the size of 
businesses that participate in the other programs.
Startup Business
    Comment: One commenter stated that the proposed definition of 
``Startup business'' needs to be clarified because it could be 
interpreted that only newly formed entities that are constructing 
ground up facilities would be considered startups. According to this 
commenter, all newly formed entities should be considered startup 
businesses.
    Another commenter stated that, for borrowers that have established 
track records/experience operating businesses, but for accountant or 
attorney, recommended formation of a new entity for each additional 
site, the proposed definition is prohibitive and should not require the 
same tangible net worth requirements as a truly new business by a 
borrower with no prior history or experience owning and operating the 
business.
    Response: The Agency agrees that the definition of startup business 
needs to be revised and has done so in the rule.

[[Page 76720]]

With regard to the comment recommending that all newly formed entities 
be considered startup businesses, in the revised definition, a newly 
formed entity would be considered to be a startup business even if the 
owners of the startup business own affiliated businesses doing the same 
kind of business, unless it buys an existing business or facility and 
the business or facility being bought remains in operation and there is 
no significant change in operations. In such instances, the newly 
formed entity would be considered an existing business, not a startup 
business.
    With regard to the second comment, the Agency agrees that an 
existing business should not be treated as a new entity solely on the 
basis of changes that merely restructure the business. The revised 
definition of ``Existing business'' addresses this issue.
    However, the Agency disagrees that it is appropriate to use the 
experience of individuals in an associated business in determining 
whether the business will be treated as a startup business or an 
existing business. While the track record of such individuals is 
helpful in evaluating the strength of the applicant, it does not change 
the fact that the entity itself is a new business that lacks an 
existing track record. Therefore, the Agency believes such a business 
should be treated as a startup business. The Agency has revised the 
definition of startup business accordingly.
Unincorporated Area
    Comment: One commenter stated that the proposed definition of 
``Unincorporated rural area'' only includes census defined place. The 
commenter stated that any unincorporated places that are less than 
20,000 and not currently included as a CDP are not eligible as the 
language is written. The commenter suggested adding language to the 
definition of unincorporated area to include open country and small 
unincorporated places that are not included as census defined places.
    Another commenter questioned whether all unincorporated areas are a 
Census Designated Place. The commenter then stated that, if not, this 
should be changed.
    Response: The Agency did not intend to exclude open space from 
being considered a rural area. The Agency has revised the definition of 
``rural or rural area'' to address the commenter's concern. The statute 
uses the phrase ``unincorporated area'' in the definition of rural area 
for the Community Facilities and the Water and Waste Disposal 
facilities programs. The Agency has determined to use the concept of 
census designated places as defined by the Bureau of the Census to be 
the equivalent of the term unincorporated area in the statute.
Abbreviations
    Comment: One commenter recommended that abbreviations in addition 
to RUS and SBA be included in the rule.
    Response: The Agency has removed the abbreviations section from the 
rule because it is no longer needed.
Agency Authorities (Sec.  5001.3)
    Comment: One commenter stated that the Office of Inspector General 
required Administrator exceptions for the Business and Industry program 
to be reviewed by the Office of the General Counsel and the Under 
Secretary and questioned why that requirement was removed.
    Response: The requirement referred to by the commenter reflects 
procedures internal to the Agency. Even though previously included in 
Agency regulations, the Agency has determined that it is not necessary 
to keep this reference to internal procedures in the regulation and, 
therefore, removed them from the rule.
    Comment: One commenter recommended that appeals should only be 
conducted if the lender requests the appeal. The commenter stated that 
a business should not be permitted to appeal a guaranteed loan decision 
without the participation of a lender. The commenter noted that this 
approach is already in practice for USDA's Single Family Housing 
guaranteed loan program (see RD Instruction 1980-D, Sec.  1980.399) and 
FSA guaranteed loan programs.
    Another commenter stated that, because lenders are the applicants 
in all guarantee programs, appeals should be allowed only when 
participated in by the lender involved in the project.
    Response: Both appeal situations referred to by the commenters are 
controlled by the National Appeals Division (7 CFR part 11). Because 
these rules apply to this regulation, there is no need for this rule to 
specifically address these appeal situations.
Oversight and Monitoring (Sec.  5001.4)
    Comment: One commenter noted that the proposed rule seems to be 
increasing the USDA's micromanagement of lenders, rather than following 
SBA's lead in being an administrator of a lender's program for 
thousands of lenders.
    Response: The Agency disagrees with the commenter's remarks. The 
Agency has made substantial changes to the rule to address similar 
concerns, especially with regard to no longer requiring copies of the 
lender's policies and procedures.
General (Sec.  5001.4(a))
    Comment: One commenter suggested revising Sec.  5001.4(a) to read 
``The lender will cooperate fully with Agency oversight and monitoring 
of lenders'' in order to move the focus to the lender.
    Response: The Agency agrees with the commenter's suggestion and has 
revised the text in the rule accordingly.
    Comment: One commenter asked what the Agency review requirements 
for other lenders was, noting approved and preferred lenders are 
reviewed every two years.
    Response: Under the rule, all participating lenders are either 
``approved lenders'' or ``preferred lenders.'' This includes regulated 
and supervised lenders as well as other lenders. Thus, another lender 
would be subject to review at least every two years, regardless of its 
being an approved or a preferred lender.
    Comment: One commenter suggested adding language that permits the 
Agency to assess the costs of the reviews of certain lenders (e.g., 
safety and soundness examinations) to the lenders being reviewed. 
According to the commenter, this would be consistent with the current 
practices of the Federal Deposit Insurance Corporation and Farm Credit 
Administration.
    Response: In response to comments made concerning lender 
eligibility, the Agency has included in the rule a provision that other 
lenders undergo an examination acceptable to the Agency in order to be 
eligible for participation in the guaranteed loan programs included in 
the rule. Thus, it is unnecessary for the Agency to include a provision 
in the rule for assessing the costs of the reviews of these lenders.
Reports and Notifications (Sec.  5001.4(b))
    Comment: One commenter stated that requiring lenders to submit 
origination and servicing policies, provide monthly reports on loans in 
default, and provide notification within 5 days of any loan agreement 
violation, restrict a lender's ability to manage these loans, and there 
is no value to this.
    Another commenter stated that Sec.  5001.4(b) needs to be totally 
reworked to better address risk, and suggested completely replacing 
this paragraph with the following:
    (b) Reports and Agency notifications. Lenders will submit to the 
Agency reports and notifications to facilitate the Agency's oversight 
and monitoring.

[[Page 76721]]

These reports and notifications include, but are not necessarily 
limited to:
    (1) For all loans in monetary default, the lender shall provide 
monthly default reports in a form approved by the Agency.
    (2) Notification in writing within 5 days of:
    (i) Downgrade in the loan classification of any loan. The lender 
will advise the Agency of classifications upgrades in a reasonable 
period of time.
    (ii) Loan is 30 days past due or is otherwise in monetary default.
    (3) Any material change in the general financial condition of the 
lender since the last periodic report to be submitted semiannually.
    (4) Otherwise required for non-routine servicing actions and as 
specified in this section.
    Response: In consideration of these and other related comments, the 
Agency has made changes to the rule that address most of these 
commenter's concerns. Specifically, the rule does not require that 
lenders submit copies of their origination and servicing policies and 
provides for 15 calendar days, instead of the proposed 5 days, for 
providing the Agency with information on loan violations. In addition, 
the Agency is requiring under the rule default reports only for 
monetary defaults rather than all types of defaults as that term is 
defined in the rule.
    The Agency agrees with the suggestion that any downgrades in a 
loan's classification be reported and has added this requirement to the 
list of items to be reported within 15 calendar days to the Agency. 
However, the Agency does not believe it is necessary to receive reports 
on upgrades in a loan's classification and has not added this to the 
rule.
    With regard to the suggestion that the Agency be notified of only 
monetary defaults rather that all defaults, as that term is defined in 
the rule, the Agency is requiring that notifications on all defaults be 
submitted within 15 calendar days because it is the Agency's intent in 
managing risk that such problem loans are addressed in a timely fashion 
and provides the Agency with better and more up-to-date information in 
its monitoring of a lender's portfolio of Agency loans.
    With regard to the suggestion on the material change in the 
financial condition of the borrower, the Agency intended this 
requirement to address the borrower rather than the lender, as was 
stated in the proposed rule. Thus, the Agency has retained this 
provision, but corrected it to apply to the borrower, as was suggested 
by the commenter.
    Finally, one commenter suggested that reports and notifications 
include those ``otherwise required for non-routine servicing actions 
and as specified in this section.'' As the Agency understands this 
comment, we believe that text in Sec.  5001.4(b) stating ``These 
reports and notifications include, but are not necessarily limited 
to:'' sufficiently covers the intent of the commenter's suggestion. 
Therefore, the Agency has not included the commenter's suggestion as a 
separate paragraph in the rule.
Periodic Reports (Sec.  5001.4(b)(1))
    Comment: One commenter stated that the semiannual Guarantee Loan 
Status Report requirements of 7 CFR Sec.  3575.69(d), which require the 
lender to report to the Agency the outstanding principal and interest 
balance on each guaranteed loan semiannually, should be stated and 
retained.
    Response: The rule provides for the submittal of a periodic report 
on a semiannual basis under Sec.  5001.4(b)(1). The periodic report to 
be used is Form RD 5001-8, Guaranteed Loan Borrower Status. The form 
provides for the reporting of outstanding principal and interest 
balance for the guaranteed loan.
Default Reports (Sec.  5001.4(b)(2))
    Comment: One commenter noted that the proposed regulations do not 
define whether a default is based on the inability to make the payment 
from cash flows or if the facility is delinquent only if the payment is 
not made.
    Response: The intent was to require monthly default reports for 
loans that are in monetary default, which occurs if payment is not made 
within 30 days after the payment due date. The Agency has revised the 
rule, including adding a definition for monetary default, to make its 
intention clear.
    Comment: One commenter suggested that loan classification be 
adopted as the primary risk indicator used by Rural Development, 
because essentially all lenders use loan classification to monitor the 
risk in their portfolios. Requiring lenders to immediately notify the 
Agency of any change in loan classification is the most effective risk 
indicator to help the Agency focus its oversight activities on the 
highest risk borrowers and lenders and better understand its risk 
exposure in the portfolio.
    Response: The Agency believes that there are a number of factors 
important to managing risk. The Agency agrees with the commenter that 
changes in a loan's classification is an important factor in managing 
risk and, therefore, has added a provision to the rule requiring 
lenders to notify the Agency when there has been an adverse change in a 
loan's classification. The Agency does not believe that it is necessary 
to require reporting when a loan's classification has improved.
    Comment: Seven commenters stated that monthly reporting for loans 
in default is over-burdensome and recommended continuing to require 
every 60 days. Two other commenters suggested that a quarterly 
reporting frequency, rather than monthly, is sufficient.
    Response: The Agency proposed a monthly reporting frequency for 
loans in default in order to better manage risk and potential Agency 
loss, and as noted in a response to a previous comment, the rule 
clarifies that monthly reporting is limited to loans that are in 
monetary default. The Agency further recognizes that monthly reporting, 
compared to quarterly or semiannual reporting, imposes increased burden 
on those lenders who have loans that are in monetary default. On 
balance, though, the Agency believes that the benefits of focusing on 
loans in monetary default on a monthly basis outweigh such increased 
costs and has retained the monthly reporting frequency for loans in 
monetary default.
Notifications (Sec.  5001.4(b)(3))
    Comment: Several commenters stated that the 5-day period for 
providing notifications was too short.
    One commenter stated that notification within 5 days is too short 
of a timeframe and not consistent with industry time standards and 
unreasonable for institutions. The commenter recommended that the 
Agency adopt 15-day notification period timeframes for paragraphs 
(b)(3)(i) and (b)(3)(ii) within this section.
    Three other commenters stated that the five-day notification of a 
loan agreement violation is burdensome and unnecessary. One of these 
commenters suggested allowing the lender 30 days to report real 
problems to the Agency.
    Two commenters recommended retaining the current regulation 
requiring notification within 10 days of any permanent or temporary 
reduction in interest rate.
    Response: The Agency agrees that the proposed 5-day period for 
notifying the Agency is unnecessarily short and has changed this to a 
15-calendar day period in the rule.
    Comment: One commenter stated that it seemed unnecessary for the 
Agency to require immediate notification of an interest rate cut, 
because the Agency's exposure is reduced by this action and the 
interest rate changes will show up

[[Page 76722]]

on the next quarterly or monthly status report.
    Response: As noted in the previous response, the Agency has revised 
the rule to allow lenders up to 15 calendar days to provide 
notification of reductions in interest rate. However, the Agency is 
still requiring notification of all interest changes in order to ensure 
compliance with the underlying promissory note.
    Comment: Five commenters provided comments on notification of a 
loan agreement violation.
    One commenter recommended that, instead of a 5-day notice to the 
Agency if the lending agreement has been violated, notification to the 
Agency of borrower covenant default occur within 30 days of the 
lender's knowledge of the default. In support of this recommendation, 
the commenter stated that there are many items in a Lending Agreement, 
not all of which are readily discernable within 5 days of default. 
Other items may be readily discernable but create much overhead if tied 
to a 5-day notice. Such items include:
    1. Reporting requirements: Notifying Rural Development within 5 
days of covenant violation creates excessive reporting overhead and is 
burdensome to the lender. Thirty days is much more appropriate.
    2. Insurance coverage: If the insurance company has failed to 
notify the lender of failure to pay insurance, the lender cannot notify 
USDA until it has knowledge of default.
    3. Financial Covenants: Guaranteed Community Facilities may have 
annual, semiannual, quarterly or monthly reporting requirements. Breach 
of financial covenants cannot be known until reporting is received and 
the lender has had time to review the reports.
    4. There are many other criteria including capital expenditures, 
negative pledges, no debt incursion, controls on the use of funds, 
etc., that may have drag time between the covenant breach, the lender's 
knowledge, the lender's response to the breach and lender's 
notification to USDA.
    One commenter recommended that, for Community Facilities, 
notification of delinquencies be provided within 30 days of monetary 
default. The commenter pointed out that Community Facilities are non-
profit organizations or public bodies. Debt Service Reserve 
requirements stipulate funding of the reserve overtime. The reserve 
fund may allow the payment to be made as agreed. The proposed 
regulations do not define whether the default is based on the inability 
to make the payment from cash flows or if the facility is delinquent 
only if the payment is not made. Thirty days is the normal collection 
period for regulated lenders. Reporting to its regulatory agency is 
based on 30, 60, 90 days past due and non-accrual.
    One commenter added that placing more reporting requirements on 
lenders will only make it more difficult for lenders to participate in 
the Business and Industry program. This commenter pointed out that the 
Lender must certify in the Lender's Agreement at closing that the loan 
will be serviced in a prudent manner. This proposed oversight by the 
Agency is restrictive, and the Agency should trust that lenders will 
act in their best interest. Placing more reporting requirements on 
lenders will only make it more difficult for lenders to participate in 
the Business and Industry program.
    Another commenter added that current reporting requirements are 
adequate for the Agency to mitigate its risk. Specifically, this 
commenter stated that requiring notification within 5 days of the 
violation of any term of the loan agreement is onerous and unnecessary, 
and does not allow for management of loss exposure other than by 
creating improbable standards so the Agency can claim improper 
servicing. For example, a borrower fails to submit financial statements 
by the specified date--the lender must notify the Agency within 5 days 
that the financial statements weren't received. To what effect? What 
will the Agency do with this information to mitigate its risk? 
Similarly, the loan agreement has financial covenants measured as of 
the end of the borrower's fiscal year but not due to the lender for 
several months. The lender wouldn't even know of the covenant violation 
until almost three months after it occurred.
    This commenter also suggested that this type of requirement is more 
intuitively found in the Lender Servicing section than in Oversight and 
Monitoring and suggested moving it there.
    Two commenters recommended that the current regulation be retained, 
stating that the current schedules are difficult enough for the lenders 
to meet, and to tighten them up would make them more difficult to 
accomplish and add no value to the servicing process.
    Response: As noted in a previous response, the Agency has revised 
the 5-day reporting period to a 15-calendar day reporting period in the 
rule.
    The Agency has not modified the language in the rule with regards 
to notifying the Agency based on when the lender became aware of the 
loan violation for two reasons. First, the lender is responsible for 
being ``on top'' of each loan it services. Second, writing into the 
rule a timeframe based on ``when the lender became aware of the loan 
violation'' would result in very practical issues of documenting when 
the lender did become aware of the loan violation. The Agency believes 
that it is more practical for the lender to properly service the loan 
and in the course of doing so will have knowledge of such issues. The 
Agency will provide guidance for failure to provide the Agency with 
information on loan agreement violations in a handbook for use by its 
field offices.
    Comment: One commenter noted that there is an inconsistency in the 
language. Section 5001.4(b)(3) requires notifying the Agency within 5 
days of default, but the Administrative section states that the Agency 
must be notified upon discovery.
    Response: The Agency's intent is to require notifying the Agency as 
stated within the rule and not as stated in the preamble. As provided 
in the rule, notification is required within 15 calendar days.
Project Eligibility (Sec.  5001.6)
    Comment: One commenter stated that the project eligibility section 
is redundant, because the existing and proposed rules provide Agency 
authorized and unauthorized projects, and thus should be eliminated. 
The commenter stated that the Agency has outlined eligible and 
ineligible projects in the proposed rule and no further eligibility 
criteria are needed unless the Agency has examples of projects that 
produced losses that should be included in the ineligible 
classification.
    Response: The two areas of the rule being referred to by the 
commenter--(1) authorized and unauthorized projects, and (2) project 
eligibility criteria--have different purposes. The authorized and 
unauthorized project lists identify the types of projects that are, 
respectively, eligible or not eligible for loan guarantees. The project 
eligibility criteria then identify for those projects that are eligible 
for loan guarantees the minimum financial metrics required for the 
Agency to consider approving loan guarantees. The project eligibility 
criteria directly address potential project risks. Therefore, the 
Agency has retained both of these aspects in the rule.
    Comment: One commenter suggested that the major eligibility 
requirements should be repeated and self-contained in the individual 
program portions so that the reader does not have to flip back and 
forth between sections.
    Response: In developing the rule, the Agency considered what the 
commenter

[[Page 76723]]

is suggesting. However, the Agency's fundamental rule of organization 
and structure provides for maintaining common provisions in subpart A 
and program specific provisions in subpart B. The Agency will use the 
handbook to address the commenter's suggestion.
    Comment: One commenter suggested adding paragraph (e) to Sec.  
5001.6 stating that the project must comply with all environmental 
policies of the agency. The commenter states that non-compliance would 
then provide the Agency with a valid reason for rejection. The 
commenter recognizes that reference is made to environmental compliance 
in Sec.  5001.7, and states that projects should also comply with the 
Consolidated Farm and Rural Development Act to protect wetlands and the 
National Historic Preservation Act (NHPA) to prohibit anticipatory 
demolition.
    Response: The Agency currently relies on its existing environmental 
regulations and clearance process to ensure that projects comply with 
its environmental policies. This rule would continue this practice and 
a separate section as proposed by the commenter is not required to 
continue this practice. The Agency will provide its staff with 
additional guidance in a handbook on this rule to ensure projects 
comply with the Agency's environmental policies, as well as the 
provisions identified by the commenter contained in the Consolidated 
Farm and Rural Development Act and the National Historic Preservation 
Act.
Benefit a Rural Area (Proposed Sec.  5001.6(a))
    Comment: Two commenters suggested changing the wording under 
proposed Sec.  5001.6(a) from requiring a project to benefit a rural 
area to: ``The project must be located in a rural area.'' According to 
the commenters, this would eliminate confusion and misdirection of 
assistance; otherwise, virtually any business transaction could claim 
to ``benefit'' some rural area.
    Response: The Agency agrees with the commenters that the proposed 
requirement that all projects to be eligible must ``benefit a rural 
area'' needs to be revised. The Agency has revised the rule as follows: 
First, the Agency has moved the requirement concerning a project's 
relationship to a rural area from subpart A to subpart B so that each 
program can address it specifically. Second, except for the Water and 
Waste Disposal guaranteed loan program, the rule requires the project 
to be located in a rural area. Third, for the Community Facilities and 
the Water and Waste Disposal guaranteed loan programs, the rule 
requires that, for a project to be eligible, it must ``primarily serve 
a rural area.'' An example of primarily serving a rural area is where 
51% or more of those being served must live in a rural area. The Agency 
will provide additional guidance on ``primarily serve a rural area'' in 
the handbook to the rule.
    Comment: Two commenters requested that the concept of ``benefit'' 
be more fully defined. The commenters stated that the Agency needs to 
identify what constitutes a benefit to a rural area (e.g., jobs 
created, service provided, and whether the size of the benefit matters) 
because leaving this concept up to interpretation may lead to 
inconsistency, ambiguity, and Agency/lender conflict. One of the 
commenters added that the clarification should be opened for public 
comment.
    Response: As noted in the response to the previous comment, the 
Agency has removed the provision that a project ``must benefit a rural 
area.'' Thus, there is no need to identify what constitutes a 
``benefit.'' For the Community Facilities and the Water and Waste 
Disposal guaranteed loan programs, this requirement has been replaced 
with the requirement that the project ``primarily serve a rural area.''
    Comment: Three commenters noted that existing regulations require 
the project to be in rural area, while the proposed rule states that 
the project must benefit a rural area. These commenters stated that 
``benefit'' be the key element in determining eligibility, not 
``location'' because many projects located outside of rural areas (such 
as food processing plants and ethanol plants) have major benefit to 
rural farmers and employees living in rural areas.
    Response: As noted in the responses to the two previous comments, 
the Agency has replaced the requirement that a project must ``benefit a 
rural area'' with the requirement(s) that the project be located in a 
rural area and/or primarily serve a rural area. This change was made, 
in part, because the authorizing statutes for some programs require the 
project to be located in a rural area, which in itself provides benefit 
to the rural area. In addition, the requirement for some programs that 
the project ``primarily serve'' a rural area allows for the location of 
the project outside a rural area, provided a program's authorizing 
statute does not require the project to be located in a rural area.
Financial Criteria (Sec.  5001.6(b)) (Proposed Sec.  5001.6(c))
    Comment: Several commenters are against setting minimum financial 
criteria. One commenter said that current regulations are more than 
sufficient for policy. The second commenter expressed concern that some 
very viable projects may not be allowed if they are required to meet 
these financial criteria and that these financial criteria may limit 
the Agency's flexibility and flexibility is necessary to using the 
programs. The third commenter stated that credit decisions are 
subjective and rely on the analysis and decisions by credit personnel 
who are not constrained by specific requirements, but create unique 
loan proposals and terms based on each individual request. The third 
commenter also suggested allowing the Federal and State Program 
Directors to set the standards of measure through their underwriting 
processes rather than through regulations.
    A fourth commenter stated that there is a possibility that a number 
of eligible applicants will be eliminated due to the loan-to-value 
requirement. Because of the inflexibilities or inconsistencies in 
project eligibility and loan-to-value ratio, this restriction of 
approval authority would not allow for the mitigation of situations 
that have merit, but that are not 100% consistent with these 
regulations.
    The fifth commenter stated that project risk is not mitigated with 
the proposed metrics, but instead the metrics mitigate economic 
expansion in rural areas and that rural businesses that otherwise would 
qualify under the program would be ineligible under the proposed rules 
thereby discriminating against rural small businesses. This commenter 
stated that the Agency is making a mistake to mitigate project risk 
through eligibility metrics rather than through establishing credit 
evaluation and loan structuring standards. According to this commenter, 
the proposed project eligibility standard offers no utility to the 
Agency or program, creates an administrative burden on the Agency that 
it is not experienced to handle, is a disincentive for small businesses 
to participate in the Agency guaranty programs, and do little to create 
fair and published eligibility standards for projects, borrowers, and 
lenders to follow.
    In contrast, a sixth commenter expressed support for having minimum 
financial criteria as a requirement for program eligibility. This 
commenter also stated that these criteria must be fully and clearly 
defined, as well as

[[Page 76724]]

being somewhat consistent with GAAP and the realities of the business 
world.
    Lastly, one commenter urged the Agency to distinguish borrower 
credit risk.
    Response: The Agency first points out that it has modified the 
financial metric criteria to reflect that they are to be applied to the 
borrower's financial condition and not to the individual project.
    The Agency proposed, and is maintaining in the rule, minimum 
financial criteria that borrowers must meet for their projects to be 
considered eligible for a loan guarantee under this rule. These minimum 
criteria have been established, primarily, as part of the Agency's 
overall effort under this rule to manage risk; in this case, project 
risk. These minimum criteria also provide program delivery consistency 
across the States and provide multi-State lenders the same level of 
expectation.
    Any financial criteria established for the borrower will not be 
able to predict with 100% accuracy the success or failure of their 
projects. However, the Agency believes that the minimum financial 
criteria will reduce the number of unsuccessful projects.
    Finally, it is important to note that these financial metric 
criteria neither replace the credit analysis that a lender undertakes 
in originating a loan nor guarantee that a borrower that meets the 
criteria will be issued a loan guarantee by the Agency. These financial 
metric criteria simply provide minimum financial thresholds for 
borrowers for their projects to be eligible under the program.
    Comment: One commenter stated that the proposed metric criteria are 
credit evaluation standards that belong in the credit evaluation 
section of the regulations and should not be used as program 
eligibility standards.
    Response: The financial metric criteria referred to by the 
commenter are not credit evaluation criteria, but set minimum financial 
thresholds for determining whether or not a loan guarantee application 
will be accepted by the Agency. Further, these minimum financial metric 
criteria do not replace the credit evaluation performed by the lender 
that is required when the application is submitted. Also, as noted 
elsewhere in this preamble, the purpose of these financial criteria is 
to address project risk, which is one of the three areas of risk the 
Agency is addressing under the new platform. For these reasons, the 
Agency is not moving these criteria to the credit evaluation section of 
the rule and is keeping them as minimum project eligibility 
requirements.
    Comment: Two commenters expressed concern that a project would be 
ineligible if it fails to meet any one of the three financial metric 
criteria. One of the commenters noted that this is the biggest impact 
of the proposed rule and that these minimum eligibility requirements 
cannot be waived. The other commenter suggested that requiring a 
project to meet these criteria is going to make deals harder to get 
approved and make the program less feasible. This commenter also noted 
that, if a lender has stricter eligibility requirements, a project 
would be required to meet the lender's requirements. A third commenter 
stated that the metrics are too restrictive for rural businesses and 
will not create, retain or promote jobs or economic growth in rural 
communities.
    Response: The Agency agrees that providing minimum financial 
metrics will eliminate some worthy projects from consideration for a 
loan guarantee. The Agency disagrees, however, that having the criteria 
will make it harder for a project to get approved because, even in the 
absence of the rule, the borrower would still need to meet the 
requirements of the lender. Finally, the Agency points out that the 
overall intent of this provision and others in the rule is to manage 
risk and these financial metrics are but one example of achieving the 
objective to mitigate project risk.
    Comment: One commenter requested that the rules allow the project 
eligibility criteria to be met on a pro forma basis.
    Response: As this comment applies to startup businesses, the Agency 
agrees that these eligibility criteria would be met on a pro forma 
basis and the rule allows this. However, for existing businesses, it is 
unnecessary and inappropriate to allow these criteria to be met on a 
pro forma basis. Existing businesses have a historical record and that 
record should be the basis for determining eligibility.
    Comment: One commenter requested that the rule allow the financial 
criteria to be met at the time of issuance of the Loan Note Guarantee, 
not at time of application.
    Similarly, another commenter stated that the Agency is proposing 
that rural businesses meet these metrics prior to evaluating the 
application and approving a loan guaranty rather than the current 
regulation which is prior to issuing the loan note guaranty. According 
to the commenter, this will result in fewer rural businesses, non-
profits, and municipalities in participating in the Agency loan 
guaranty programs.
    Response: As noted in responses to previous comments on this 
section of the rule, these financial metric represent minimum 
thresholds and do not determine whether or not the Agency will issue 
the loan guarantee. The Agency believes that borrowers meeting these 
minimum threshold criteria are more likely to succeed than those that 
do not. Thus, the Agency believes it needs to have this information at 
the time the application is received. Further, these minimum financial 
metric criteria, including any financial criteria identified in the 
Conditional Commitment, are to be maintained up to and through the 
point in time when the Agency issues the Loan Note Guarantee. Failure 
to maintain these minimum criteria will result in an ineligible 
application. Again, as stated in a previous response, just because a 
borrower meets the minimum financial metric criteria does not mean that 
the borrower will automatically receive the Loan Note Guarantee. The 
Agency will still review the lender's analysis and other information in 
making its determination on whether or not to issue the Loan Note 
Guarantee.
    Comment: Two commenters stressed the difference in requirements for 
profit and nonprofit lending. One commenter stated that program 
underwriting should be different for profit and nonprofit lending and 
is against posting minimum standards through USDA regulations. It 
recommends the retention of the Guaranteed Facilities regulations on 
this subject as is. The other commenter pointed out that the accounting 
standards are different, the revenue streams are different, and the 
protection of stockholders in the event of a default is significantly 
different from the protection afforded taxpayers or rate payers in the 
event of a municipal default.
    Two other commenters expressed similar concerns, stating that many 
of the requirements for lending to nonprofit corporations and public 
bodies do not work well with for-profit businesses. The commenters 
illustrated their concerns by referring to the proposed collateral 
requirement indicating a 1-to-1 debt-to-value ratio. According to the 
commenters this is common when lending to non-profit organizations and 
public bodies in the Water and Waste Disposal and Community Facility 
programs, but it is extremely uncommon and not recommended when loaning 
to for-profit businesses. A common maximum collateral ratio for for-
profit businesses is a 1-to-1 debt to discounted value. Current 
regulations do permit lending over the maximum debt to discounted

[[Page 76725]]

value only if the cash flow is unusually strong for the type of 
business and the ratio does not exceed 1-to-1 on the loan-to-value 
ratio.
    Response: The Agency disagrees with the commenters that the 
financial metric criteria setting minimum thresholds need to be 
different solely on the basis of whether the borrower is a nonprofit or 
for-profit entity. Further, it is unnecessary at this stage of the 
process to require discounting when calculating the financial metric 
criteria, as suggested by the commenters referring to the loan-to-value 
criterion. Such discounting will occur, as directed by the Agency, when 
the lender conducts its analysis.
Debt Coverage Ratio
    Numerous commenters expressed concern over using debt coverage 
ratio as a financial metric criterion, ranging from dropping this as a 
financial metric criterion to its appropriateness. These concerns are 
addressed below.
    Comment: Three of the commenters stated that using this criterion 
would most likely eliminate most startups and expansions of businesses, 
which in general do not have a positive debt service coverage in the 
startup or expansion phases of operations. A fourth commenter stated 
that this specific metric would curtail the Agency's ability to support 
new businesses in rural areas that frequently have insufficient debt 
service coverage during ramp-up and, therefore, should be removed from 
the rule. Further, according to the commenter, it is common for solid 
businesses to expand into new projects which do not, initially, have 
debt service as individual projects, but have substantial long-term 
possibilities. Lastly, a fifth commenter stated that this criterion is 
particularly unfair to startup businesses who may not project this 
threshold for one or two years.
    Response: The Agency agrees with the commenters that as proposed 
this financial metric could pose unnecessary difficulties for startup 
borrowers and expansions of such borrowers. Therefore, the Agency has 
revised the definition of debt coverage ratio to be based, in part, on 
the ``realistically projected earnings and cash injection.'' This 
change addresses the concerns of the commenters.
    Comment: One commenter stated that defining a specific debt service 
coverage ratio could result in the exclusion of credit accommodations 
to otherwise qualified and desirable borrowers. According to this 
commenter, a mandatory coverage ratio would eliminate those companies 
who may have had a significant, but nonrecurring expense item in the 
most recent reporting period, applicants with growing and improving 
trends which permit a reliable projection of prospective repayment 
ability, and, by definition, startup applications. The commenter stated 
that a standard that sets forth a reasonable expectation of repayment 
ability is inherent in every reasonable loan request, but to attempt to 
quantify and codify a requirement that is often subjectively determined 
is inappropriate.
    Response: The Agency believes that it is appropriate to include 
basic financial metric criteria as part of the Agency risk management 
strategy under this rule. However, we agree, as noted in the response 
to the previous comment, that revision to the definition of debt 
coverage ratio is needed to address startups and business expansions. 
This revision requires this ratio to be calculated based, in part, on 
the business' ``realistically projected earning and cash injection.'' 
This change provides flexibility to a business that has experienced, as 
the commenter states, a ``significant, but nonrecurring expense item in 
the most recent reporting period.'' Thus, the rule addresses this 
comment.
    Comment: One commenter stated that it is not critical that a 
project has debt service as long as the borrower has debt service.
    Response: The Agency agrees with the commenter. Because the rule 
allows the Agency to review borrower statements, the Agency does not 
believe it is necessary to make revisions to the rule in response to 
this comment.
    Comment: One commenter stated that having a litmus test with no 
flexibility could be unfair to rural businesses with unusual 
circumstances, such as natural disasters or national economic 
downturns. Three other commenters also suggested that the rule should 
also provide for mitigating circumstances in case the ratio is not met.
    Response: The intended benefits of improved risk management 
provisions included in the rule outweigh the potential loss of projects 
due to the occurrence of individual and unusual instances. Further, the 
rule has been modified to base the criteria on a typical operating 
year, which would accommodate businesses affected by unusual 
circumstances, such as those suggested by the commenter.
    Comment: One commenter stated that a debt coverage ratio of 1.0:1 
is a credit criterion and should not be used as a project eligibility 
standard. According to the commenter, it discriminates against 
borrowers and projects that may have high impact to rural communities 
that do not generate income for two or three years that the current 
regulations allow. The commenter recommended that the debt coverage 
ratio of 1.0:1 be incorporated in Sec.  5001.16(b)(2)(ii), under Lender 
responsibilities--Origination, to provide parameters desired by the 
Agency without compromising project eligibility. By inserting credit 
evaluation standards in the proposed rules, the Agency can reserve the 
right not to approve a project either in the pre-application or 
application stage as opposed to never seeing a possible high impact 
project. In other words, project risk mitigation can be accomplished in 
credit evaluation and structuring the loan, not in creating an 
eligibility criterion.
    Response: The rule allows the calculation of the debt-coverage 
ratio to be based on the ``realistically projected earnings and cash 
injection before interest, taxes, depreciation, and amortization by the 
annual debt service (principal and interest)'' rather than, as 
proposed, on ``the net operating income by a business's annual debt.'' 
This change in the calculation of the debt coverage ratio addresses the 
concern expressed by the commenter for borrowers and projects that may 
have high impact to rural communities, but that do not generate income 
for two or three years.
    As noted in a response to an earlier related comment, the Agency 
continues to believe that providing minimum financial criteria for 
project eligibility is necessary to mitigate project risk and thus has 
not moved this or the other two financial criteria to the origination 
provisions of the rule as suggested by the commenter.
Debt Ratio Definition and Calculation
    Several commenters commented on the definition of debt coverage 
ratio and how it is to be calculated. For example, one commenter stated 
that a minimum debt coverage of 1.0 is fine, but that the definition 
and calculation of this ratio is crucial. Specific comments suggesting 
changes are addressed below.
    Comment: One commenter asked if the requirement is based on 
historical or projected financial statements or both. Another commenter 
expressed a similar question, noting that the proposed regulations do 
not state how long this coverage must be in effect, and then asked if 
this is historical debt service coverage or projected, a year or six 
months?
    Response: The calculation of this financial metric would be based 
on either ``realistic information in the pro forma statements or 
borrower financial

[[Page 76726]]

statements.'' The ratio is to be calculated based on ``a typical 
operating year after the project is completed and stabilized.''
    Comment: One commenter suggested that there are many ways to look 
at debt coverage, and the less prescriptive, the better. A second 
commenter stated that instead of using debt coverage criterion, the 
Agency should use EBITDA (earnings before interest, taxes, 
depreciation, and amortization) coverage or allow USDA officers to 
ensure adequate demonstrated debt coverage. In addition, defining debt 
coverage based on net operating income is not appropriate for operating 
businesses, as this term is used with rental property and not with 
owner-user underwriting.
    Response: The Agency agrees that there are many ways to assess and 
calculate debt coverage ratio. In consideration of this and other 
comments, the Agency has revised the definition of debt coverage ratio 
to take into account, in part, the concepts suggested by the one 
commenter on using EBITDA as a basis for determining the debt coverage 
ratio.
    Comment: Three commenters stated that the proposed wording for 
Business and Industry guaranteed loans pertaining to debt service 
coverage ratio of 1.0 or higher is unclear and provided alternate 
wording to describe debt service coverage for Business and Industry 
guaranteed loans as ``loans for 100% refinancing should be able to 
demonstrate a historical debt service coverage ratio of 1.0 or higher 
for the refinanced loan and loans other than for 100% refinancing 
should be able to demonstrate a pro forma debt service coverage ratio 
of 1.0 or higher once fully operational'' for a project to be eligible. 
According to these commenters, the language in the proposed rule could 
suggest that historical cash flow must provide debt service coverage of 
1.0 even though proceeds of the new Business and Industry guaranteed 
loan will be used to expand that business resulting in additional cash 
flow available for debt service, which is not logical.
    Response: The Agency agrees the definition of debt coverage ratio 
as it pertains to the Business and Industry guaranteed loan program (as 
well as for the Rural Energy for America Program) needs to be further 
clarified. The Agency has revised the rule to incorporate part of the 
commenters' suggestion by requiring the financial metric criteria to be 
calculated from the ``realistic information in the pro forma statements 
or borrower financial statements of a typically operating year after 
the project is completed and stabilized.''
    Comment: Two commenters stated that during the startup phase, the 
business's debt service coverage ratio may actually be less than 1.0 
until later years when it is fully functional, and asked if this makes 
the projects ineligible.
    Response: As noted in a response to a previous comment, startup 
businesses would be required to calculate this ratio based on a 
``typical operating year'' once the project is completed and 
stabilized. If, based on that ``typical operating year,'' the ratio is 
less than 1.0, the project would not be eligible for a loan guarantee 
under this program.
    Comment: Three commenters suggested that the debt coverage ratio of 
1.0 is too low. Two of these commenters suggested that the debt 
coverage ratio should be increased to 1.20:1 or use the lender's normal 
established debt coverage ratio standard. The third commenter stated 
that the metric of 1.0 or higher may be acceptable for Community 
Facilities and Utilities, but is too low for Business and Industry, and 
that for-profit entities should have a ratio that is higher than 1.0.
    A fourth commenter described its procedure for evaluating and 
monitoring the credit. The commenter compares the company's cash flow, 
measured as Earnings Before Interest, Taxes, Depreciation, and 
Amortization, to the required debt service (principal and interest 
payments). The commenter expects a sufficient coverage (1:1), but 
allows for periods of shortages when alternative sources of repayment 
or working capital are available. The long-term objective is for the 
customer to attain a coverage ratio that provides a 10 to 20% margin.
    Two commenters expressed concern about the requirement of a debt 
service coverage (DSC) of 1.0 or higher to be eligible, because a DSC 
ratio of 1.0 is considered marginal or substandard when lending to a 
for-profit business and current Business and Industry regulations (7 
CFR Sec.  4279.101(b) last paragraph) prohibits issuing loan guarantees 
to marginal or substandard loans.
    Response: As noted in previous responses, this financial metric 
criterion is intended to be a minimum threshold to be met in order for 
an application for loan guarantee to be submitted. It does not 
represent an assurance that any project that meets the minimum will be 
approved for the loan guarantee. The Agency may require, as reflected 
in the Conditional Commitment, a higher ratio be met in order to 
approve the loan guarantee.
    In addition, in response to another comment, the rule in subpart B 
for business and industry specifically states under Sec.  
5001.103(j)(1): ``Marginal/substandard loans. It is not intended that 
the guarantee authority will be used for marginal or substandard loans 
or for the relief of lenders having such loans.'' In summary, the rule 
provides for the concerns expressed by these commenters.
    Comment: One commenter stated that the proposed financial metric 
criteria are below industry standards for municipal finance. According 
to the commenter, a 1:1 debt service coverage is too low and is not 
acceptable in municipal financing and most USDA direct loans for 
utility financings require at least a 1.2:1 coverage ratio.
    Response: The value selected for this criterion is the minimum 
acceptable value for a project to be considered for a loan guarantee; 
it is a minimum threshold value. As such, it is not intended to reflect 
industry standards or imply that all projects that meet this value will 
be issued a Loan Note Guarantee. The Agency will evaluate the lender's 
analysis on the project and determine if it will issue a Loan Note 
Guarantee on the basis of that evaluation and other material, not just 
the debt service coverage ratio. Therefore, the Agency has retained 
this value in the rule.
Cash Equity (Proposed Sec.  5001.6(c)(2))
    Numerous commenters were concerned over the proposed cash equity 
requirement for project eligibility. Many commenters stated that this 
proposed criterion was not well defined, was too stringent and 
inflexible, and needed to be dropped. For example, one commenter stated 
that a 10% cash equity requirement will eliminate most Business and 
Industry projects. Many commenters suggested alternatives to cash 
equity as potential financial metrics. The following summarizes the 
comments received on cash equity as a financial metric criterion.
    Comment: One of the commenters asked, ``What is cash equity?'' and 
stated that the cash equity criterion would make it difficult for most 
loan proposals processed through Business and Industry to be eligible. 
One commenter suggested going with the GAAP definition of equity.
    Another commenter stated that if the cash equity requirement is a 
cash match requirement, rather than a tangible book equity requirement 
as per the current Business and Industry Guarantee regulations, it will 
prohibit 100% loan financing of a new building even if the

[[Page 76727]]

business or community facility currently has no long term debt, needs 
its cash for inventory or working capital, and has operated 
successfully for years. The commenter concluded that this requirement 
should be eliminated from the WEP, CF, and 9006 sections.
    A third commenter stated that this metric should be dropped for 
several reasons:
    (1) Requiring this metric to be met prior to an application being 
submitted rather than prior to loan note guaranty being issued is very 
restrictive to rural business, more so than the current Business and 
Industry Regulations, which will result in fewer eligible projects for 
consideration that offer job creation, growth or retention that would 
contribute to rural economic growth.
    (2) Quality projects that otherwise would qualify under the 
existing regulations would not be eligible under the proposed rule.
    (3) The Agency is proposing a confusing metric. This metric does 
not provide any indication of a company's capitalization, does not 
mitigate project risk, provides no assurance of cash flow, and adds no 
utility in determining a project's eligibility or mitigating a 
project's risk.
    Two commenters stated that the proposed cash equity requirement 
would disqualify many of their existing USDA guaranteed customers. One 
of these two commenters added that these customers would not be 
disqualified because they were bad borrowers, but because they had 
invested all their available cash into growing their businesses, and 
this commitment by them should not be punished.
    One commenter does not favor cash equity because business owners 
will have only enough cash on hand to operate their business, with the 
balance being reinvested or used to pay down their debt.
    Response: While the Agency agrees that the proposed rule did not 
clearly identify what was meant by ``cash equity,'' the Agency has 
replaced cash equity as a financial metric criterion with debt-to-
tangible net worth ratio, as discussed below in a response to comments 
suggesting alternatives to cash equity. For reasons stated previously 
in response to comments concerning the financial metric criteria in 
general, the Agency continues to believe that these financial metrics 
provide useful risk management aspects to the rule and has retained 
such criteria in the rule.
    Comment: One commenter suggested eliminating the tangible equity 
requirement, because State loan committees provide additional 
objectivity in reviewing Business and Industry guarantees to mitigate 
perceived risk. According to the commenter, any remaining perceived 
risk could be mitigated by revising 7 CFR 4279.16(c) regarding State 
Loan Committees. These committees could be encouraged to supplement the 
credit quality standards found in 7 CFR Sec.  4279.131 with loan-to-
value maximums based on type of collateral, industry risk, regional 
lending practices, and other underwriting standards for credit quality.
    Response: As noted in the previous response, the Agency is 
replacing cash equity with debt-to-tangible net worth ratio. Further, 
the Agency points out that Sec. Sec.  4279.16 and 4279.131 are not 
relevant to the 7 CFR 5001 rulemaking process. Finally, the Agency 
notes that, in response to a comment from this same commenter on the 
use of State Loan Committees, the Agency will provide guidance in the 
handbook to the rule, which will note, in part, that each program will 
make a determination as to whether or not to have a loan committee. 
Therefore, the Agency has not revised the rule in response to this 
comment.
    Comment: One commenter stated that GAAP does not define cash 
equity, financial statements are prepared in accordance with GAAP, GAAP 
does not calculate ratios, and that this is part of credit analysis.
    Response: As noted in the previous responses, the Agency is 
replacing cash equity with debt-to-tangible net worth ratio, which is a 
GAAP defined measure. Thus, the concerns expressed by the commenter 
over the proposed cash equity criterion are no longer relevant.
    Comment: Seventeen commenters suggested modifying the cash equity 
criterion as proposed or replacing it. Commenters frequently suggested 
using the current tangible balance sheet requirements, but others 
expressed concern with using them. The suggested alternatives and 
modifications were:
     Tangible net worth;
     Follow Title 12, Part 34, Subpart D, Appendix A, which 
gives detailed requirements for appraisals and loan-to-value ratios for 
construction loans;
     An overall balance sheet requirement is appropriate and 
has been a part of the Rural Development Administration's Business and 
Industry standards. Require GAAP balance sheet equity of 10% for 
existing business or 20% for new business. Most private sector lenders 
normally require balance sheet equity as defined by GAAP, not tangible 
balance sheet equity or cash balance sheet equity.
     GAAP equity with the addition of appraisal surplus at 10% 
and 20% for existing businesses and startup businesses, respectively. 
The 20% requirement for startup projects should allow equity 
contributions other than cash, such as land and buildings. Change the 
current tangible equity to 10% equity for existing businesses, figured 
according to GAAP, and allow subordinated debt to be considered equity.
     Replace ``cash equity'' with ``equity,'' including fair 
market value, with no reference specifically to ``cash.''
     Tangible sheet equity. For example, many businesses have 
substantial equity, but are short on cash.
     Tangible balance sheet equity for the Business and 
Industry section, as per the current regulations, and eliminate the 
cash equity requirement from the WEP, CF, and 9006 sections.
     Adjust tangible balance sheet equity requirement such that 
it is a balance sheet equity test (not tangible) for existing 
businesses, and stay at 20% tangible balance sheet for new businesses.
     Expand to an either/or whereby a borrower must have 10 or 
20% tangible equity or inject 10 or 20% cash into the proposed project.
    Some commenters stated that the inclusion of off balance sheet 
equity, such as the equity found in commonly owned real estate, should 
be allowed when calculating the leverage/equity requirement for program 
eligibility. One commenter stated that the balance sheet equity 
requirement should be eliminated completely, or at a minimum be 
modified to include the off balance sheet value of tangible assets and 
subordinated debt owed to the owner. The difference between the 
depreciated book value of real property assets and their current market 
value, as well as subordinated owner debt, should be considered if a 
balance sheet equity requirement is in place.
    One commenter stated that the current requirements of tangible 
balance sheet equity of 10% for existing businesses and 20% for new 
businesses should remain the same for equity measurement; if cash is a 
concern, a liquidity measure should be imposed, such as 1:1 current 
ratio.
    Two commenters suggested changing the requirement to tangible book 
equity for the Business and Industry section as per the current 
regulations. According to these commenters, the cash equity requirement 
appears to be a cash match requirement for the project and not a 
tangible book equity requirement as per the current Business and 
Industry Guaranteed regulations. If this is a cash

[[Page 76728]]

match requirement, it will prohibit 100% loan financing of a new 
building even if the business (or community facility) currently has no 
long term debt, needs its cash for inventory and working capital for 
the expanded venture, and has operated successfully for years. The 
commenter stated that this is not good loan structuring. This commenter 
also stated that generally there has not been a tangible balance sheet 
equity (TBE) requirement for lending to nonprofit corporations or 
public bodies, but there have been very specific TBE requirements for 
lending to for-profit businesses. This commenter noted that this 
requirement was omitted from the proposed regulation and suggested that 
it be reinstated only for the Business and Industry portion of Subpart 
B of Part 5001.
    Another commenter provided three reasons for using tangible balance 
sheet equity versus cash equity, and adds that cash equity should be 
removed from the Section 9006 Energy Program and be replaced with 
tangible balance sheet equity requirements that Business and Industry 
currently use for the same three reasons. This commenter's reasons, in 
brief, were:
    (1) There is no difficulty in applying the tangible balance sheet 
equity criterion and GAAP provides clear guidance on tangible and 
intangible assets;
    (2) The private sector is not moving away from the use of tangible 
sheet equity; and
    (3) Requiring cash equity will result in significantly weaker 
guarantee applications and greater losses to the agency.
    Another commenter believes that the minimum cash equity is 
generally not enough overall equity needed for a company; however, the 
balance of the cash equity and lender's expectation of the total equity 
or net worth allows for a balanced approach for USDA guaranteed loans. 
The commenter added that the contribution of specific operating assets, 
existing net worth, and subordinated debt positions often allow for a 
company to attain adequate equity for improved probabilities of a 
successful business.
    Response: The Agency considered carefully all of the suggestions 
made by the commenters concerning cash equity as a criterion and the 
alternatives they presented. On balance, the Agency agrees with the 
commenters that cash equity may not be the most useful or practical 
metric to evaluate the project's equity, even if the Agency were to 
adopt some of the suggested revisions to cash equity offered by the 
commenters. Therefore, the Agency has decided to drop cash equity from 
the rule.
    The Agency then examined the alternatives posed by the commenters, 
as discussed briefly below. In assessing a replacement criterion, the 
Agency agrees with the sentiment of many commenters that the metric 
needs to be commonly used and understood by lenders; for example, the 
metric is GAAP defined. Based on its assessment of the alternatives, 
the Agency determined that debt-to-tangible net worth ratio, a GAAP 
defined measure, is the most suitable replacement for cash equity.
    One commenter suggested using Title 12, Part 34, Subpart D, 
Appendix A. Title 12 is a Comptroller of the Currency, Department of 
the Treasury regulation that describes real estate lending standards. 
As such, it is not suitable to be included as a metric for programs 
included in this rule because the purposes of these programs are much 
broader than real estate lending. However, the three financial metrics 
discussed in Title 12 are otherwise provided for in this rule. Further, 
in response to other commenters, the Agency modified the rule in 
subpart B for the Business and Industry and the Rural Energy for 
America programs to provide standards for discounting collateral. This 
modification addresses the commenter's concern.
    Many commenters recommended using the current tangible balance 
sheet requirement, or some variation thereon, under the Business and 
Industry regulations. The Agency determined that tangible balance sheet 
equity is an Agency derived measure and is not either a GAAP measure or 
a measure used by the Risk Management Association. Further, even though 
this measure is familiar to Business and Industry lenders, the Agency 
has determined that other measures are more suitable and less 
complicated. Therefore, the Agency has decided not to adopt tangible 
balance sheet equity for any of the programs under this rule.
    With respect to the suggestion that the Agency use GAAP equity with 
the addition of appraisal surplus at 10% and 20% for existing and 
startup businesses, respectively, the Agency points out that appraisals 
are used when making loans, but not for determining project 
eligibility. The Agency does not want to make lenders conduct 
appraisals with each application because this would be cost 
prohibitive. If appraisals are available at the time of application, 
they are to be submitted with the application. Otherwise, the lender 
must submit complete appraisals to the Agency before loan closing. 
Finally, this metric is used in the rule to establish a minimum 
threshold.
    With respect to the suggestion that the Agency replace ``cash 
equity'' with ``equity,'' including fair market value, with no 
reference specifically to ``cash,'' the Agency points out that cash 
equity has been dropped from the rule and fair market value would be 
required when conducting appraisals and, as noted the above paragraph, 
appraisals are not required in determining any of the minimum financial 
metrics.
    Some commenters suggested that the metric selected allow 
consideration of ``off balance sheet equity.'' The Agency is concerned 
about allowing appraisal surplus in the calculation. If a lender wishes 
to use off balance sheet equity from another business, then that 
business can simply become a co-borrower. Thus, the Agency has not 
included ``off balance sheet equity'' in the rule.
    Comment: Two commenters indicated that the cash equity requirement 
is too restrictive. One commenter stated that the result would be that 
many quality applications would become ineligible and that those that 
can come up with 20% cash equity most likely would not need a 
guaranteed loan. The other commenter stated that most businesses it 
works with struggle to meet the current requirement (10% tangible 
balance sheet equity for an existing business and 20% tangible balance 
sheet equity for a new business), and the proposed new rule would make 
most of its applicants not qualify for the program.
    Response: As noted in responses to previous comments, the Agency 
has dropped cash equity as a financial metric criterion. In its place, 
the Agency is using debt-to-tangible net worth ratio. This financial 
metric differs from cash equity, in part, by not requiring the business 
to tie up assets in cash and provides more flexibility to businesses 
seeking a loan guarantee. Thus, the rule addresses these commenters' 
concerns.
    Comment: One commenter stated that this metric may be acceptable 
for business and industry guaranteed loan, but is not acceptable for 
Community Facilities and Utilities. While the proposed regulations 
allow for community support to mitigate this measure, this will, 
according to the commenter, place Rural Development in the position of 
trying to quantify the value of community support versus cash equity.
    Response: As noted in responses to previous comments, the rule does 
not include cash equity as a financial metric. Further, the Agency 
agrees with the commenter that certain financial

[[Page 76729]]

metrics are not appropriate for all projects. Thus, the applicable 
financial metrics to be applied to Community Facilities and Water and 
Waste Disposal projects differ from those to be applied to business and 
industry projects. Specifically, Community Facilities and Water and 
Waste Disposal projects would be allowed to satisfy the debt coverage 
ratio and the debt-to-tangible net worth ratio criteria with community 
support. This approach is appropriate for these types of broad 
community supported projects and is also consistent with current 
program administration, with which the Agency has had good experience.
Loan-to-Value Ratio (Sec.  5001.6(b)(3)) (Proposed Sec.  5001.6(c)(3))
    Comment: One commenter stated that it would seem reasonable to 
require a certain loan-to-value, regardless of tangible net worth, 
because, given a fully depreciated building, the real net worth would 
be substantially higher than book value. According to the commenter, 
the real net worth is what would repay a loan if the collateral is 
liquidated.
    Response: The Agency appreciates the commenter's support for a 
loan-to-value ratio, which the rule continues to provide for. Further, 
the Agency points out that it makes its decision on whether to issue a 
Loan Note Guarantee based on the value of the asset, in accordance with 
commercial lending standards and generally acceptable account 
principles, as the commenter suggests.
    Comment: One commenter stated that the proposed rule is unclear in 
its application of loan-to-value and that adding this standard is not 
likely to improve credit quality, but will add confusion.
    Response: The loan-to-value ratio will be applied in the rule as 
one of three metrics that must be met at the time an application is 
submitted for a loan guarantee under this program. Including loan-to-
value ratio as a criterion is consistent with OMB Circular A-129, which 
provides guidance on the management of Federal credit programs and 
specifically refers to loan-to-value ratio as a criterion for managing 
programmatic risk. Thus, the Agency has retained this criterion in the 
rule.
    Comment: Seven commenters suggested that the loan-to-value ratio be 
modified to take into account discounted values, as is the practice 
under the current Business and Industry regulations, and that the value 
of 1.0 is too lenient. Commenters also suggested either specific 
discounting values for certain types of collateral or letting lenders 
use their own policies for setting discounted values. Specific comments 
are presented below.
    Two commenters suggested using current loan-to-value criteria for 
for-profit businesses as explained in RD AN 4279 (4279-B).
    Three commenters agree that a loan-to-value of 1.0 would be okay if 
it is loan-to-discounted-value. Two of the commenters added that this 
means that you would use the market appraised value discounted as in 
the old regulation, and that this ratio should also be used. Another 
commenter recommended changing this proposed criterion to a discounted 
loan-to-value of 1.0 to 1.0 for Business and Industry projects.
    One commenter suggested that a 1.0 loan-to-value ratio is extremely 
lenient and that it would be more prudent to insist on a loan-to-
discounted value of no more than 1.0, specifying that collateral 
discounts are to be set by lender policy but never higher than 80% for 
fixed assets (real property and equipment) and 60% for current assets 
(accounts receivable and inventory).
    Another commenter suggested that the Agency use the lender's 
commercial loan loan-to-value ratios established for commercial real 
estate/fixed assets, equipment, inventory, and accounts receivable and 
project specific.
    Another commenter states that higher loan-to-value ratios would 
seem appropriate, as banks will normally go up to 85% on accounts 
receivable, 65% on land with entitlements/utilities, 50% on raw, and 
100% on new equipment.
    One commenter states that it generally wants a ratio of less than 
1.0:1 for the loan-to-value, where value is defined as market value of 
the on-going operation.
    One commenter stated that the proposed loan-to-value is too 
lenient. Federal regulations require lenders to establish discounted 
values for their credit policy. For real estate and equipment, normal 
advance rates would be 80% of fair market value or less.
    One commenter suggests that this metric is too low for some 
programs.
    One commenter stated that a loan-to-value ratio of no more than 
1.0:1 is too risky and does not meet the Agency's goal of reducing 
risk. This measurement, as defined, means the loan will equal 100% of 
the value of the collateral. According to the commenter, a more 
appropriate loan-to-value ratio is a discounted-loan-to-value no 
greater than 1.0:1 and the commenter recommended that the Agency adopt 
an additional requirement that states that no loan should be greater 
than the discounted-loan-to-value ratio. According to the commenter, 
loan-to-value, as a measurement of risk, is a poor guideline in that a 
1.0:1 loan-to-value means the loan equals 100% of the value of the 
collateral; or, in other words, there is no equity cushion. The 
commenter then stated that a discounted-loan-to-value is a better 
measurement of collateral coverage in that a discount is applied to the 
type of collateral pledged for the loan. The commenter noted that it is 
prudent to have equity in collateral.
    Response: The Agency agrees that it is appropriate in evaluating a 
loan to determine the loan-to-discounted value ratio. The Agency 
further agrees that, for most loans, a loan-to-value of 1.0 is too 
lenient. However, the rule proposed a loan-to-value ratio of 1.0 as one 
of three minimum threshold levels that must be met in order for an 
application for loan guarantee to be submitted, not as a criterion for 
determining whether the Agency would issue a Loan Note Guarantee. As a 
threshold criterion, the Agency continues to believe it is appropriate 
to keep this ratio as ``loan-to-value'' and at a 1.0 level. Each 
individual program will evaluate loan applications and loan-to-
discounted value ratios appropriate for the program. This will be done 
when the Agency considers whether to issue the Loan Note Guarantee and 
not at the application stage.
    With regard to the suggested specific discounted values, the rule 
contains discounted values for the Business and Industry program and 
the Rural Energy for America program. For other types of collateral in 
these two programs and for the other programs, the Agency will identify 
appropriate discounted values in the Conditional Commitment. The lender 
is required to use either the discounted values in the rule or in its 
own policies and procedures, whichever is more stringent, unless 
otherwise approved by the Agency.
    Comment: One commenter expressed concern over how ``value'' will be 
determined, and used examples of rural water pipelines and special 
purpose community facility buildings to show where the value is not 
equal to their cost. Similarly, another commenter suggested that this 
metric is not applicable at all for other programs, citing as examples 
that valuation of community facilities or utilities is very difficult 
and while they are invaluable to the community, they are valueless if 
not in operation or not operated to the expected level of efficiency.
    A third commenter stated that no collateral value should be given 
on other assets, such as intangibles, unless the lender is a preferred 
lender, and

[[Page 76730]]

then, it should be limited to a 25% discounted value.
    Response: The Agency agrees with the concern expressed by the one 
commenter as to how value will be determined for those situations cited 
by the commenter.
    With regard to the second commenter's concern not providing 
collateral value to other assets, such as intangibles, unless the 
lender is a preferred lender and then limiting it to 25% discounted 
value, the Agency agrees with basic tenet of comment with respect to 
intangibles and with discounting collateral as it applies to the 
Business and Industry and the Rural Energy for America programs. The 
Agency, as noted in a previous response, has addressed these concerns 
in the rule in subpart B for these two programs. However, for the 
Community Facilities and the Water and Waste Disposal programs, in 
consideration of the limited market for these facilities, the Agency 
will consider community support in lieu of the evaluation of equity. 
Finally, the Agency reiterates that at this stage of the process the 
loan-to-value ratio is a screening metric and does not need to address 
these concerns, which will be addressed when the Agency reviews the 
lender's analysis in determining whether or not to issue the Loan Note 
Guarantee.
    Comment: One commenter recommended that the Agency specify that it 
may alter the discounted values in the rule from time to time as 
underwriting conditions change through the publication of a Federal 
Register notice.
    Response: The Agency agrees with the commenter that the Federal 
Register provides a mechanism for modifying discounting metrics found 
in the rule. If the Agency elects to use this mechanism, it would do so 
through a proposed rule published in the Federal Register allowing for 
public comment.
    Comment: Two commenters stated that there appears to be confusion 
in setting an equity ratio for applicants pointing out that project 
equity and tangible book equity do not mean the same thing. Project 
equity means the applicant has to provide matching dollars to the total 
project cost and is unusual when lending to for-profit businesses. This 
equity is determined more by discounting the value of the collateral 
than actually setting the project equity, and if a business has 
sufficient collateral even after discounting, USDA could approve a loan 
for 100% of the project so long as the business has sufficient tangible 
balance sheet equity.
    Response: The Agency has revised the rule to state that the 
financial metric criteria are to be determined based on the borrower's 
position and the loan being sought. In addition, the proposed cash 
equity criterion has been replaced with a debt-to-tangible net worth 
ratio.
Unauthorized Projects and Purposes (Sec.  5001.7)
    Comment: One commenter noted that under this section, it is 
proposed that certain projects not be considered as eligible type 
projects. The commenter expressed concern that certain projects, while 
financially risky, can still make good projects for the agency to be 
involved with, if additional financial and/or environmental assurances 
are in place to mitigate the risk. The commenter would prefer that new 
regulations require additional financial and/or environmental assurance 
in order to be guaranteed.
    Response: There are several reasons as to why projects are 
identified as being ineligible. For example, some projects are 
ineligible because of the program's authorizing statute. Some projects 
are included as ineligible because they are not of the type that would 
be consistent with the types of projects authorized by a program's 
statute. This is especially true for racetracks and the authorizing 
statute for Community Facilities program. In other instances, the 
Agency has experienced losses to the extent that the Agency has 
determined that such projects are not acceptable. The Agency believes 
that the environmental and additional financial requirements in this 
regulation, and elsewhere, are sufficient to address project risk and 
does not believe it is in the best interest of the rule to include 
additional criteria in order to allow specific projects that fall 
within the list of ineligible projects.
    Comment: One commenter stated that, although illegal in most 
States, cock-fighting (and possibly other businesses) is legal in 
Puerto Rico and possibly other areas of the country or U.S. 
territories, but probably not an appropriate business for a Federal 
loan guarantee. The commenter suggested considering language to address 
this issue.
    Response: While lengthy and specific, the list of ineligible 
projects is not intended to be ``all inclusive.'' The Agency can use 
the annual NOFA process to identify additional other inappropriate 
projects, as specified in Sec.  5001.7(o), as warranted. The Agency 
does not believe that it is necessary to include cockfighting in the 
list of ineligible projects.
    Comment: One commenter recommended deleting proposed Sec.  
5001.7(a), investment or arbitrage, or speculative real estate 
investment, as an unauthorized project or purpose. The commenter 
explained that this is necessary for many rural development projects. 
The commenter also questioned what would constitute investment vs. non-
investment properties. The commenter stated that both proposed Sec.  
5001.7(a) and (m), commercial rental, still meet USDA's mission to 
create jobs in rural areas and that to no longer allow this type of 
development is contradictory.
    Response: The Agency does not disagree that certain projects 
included in the list of ineligible projects would provide jobs in rural 
areas. However, it is the Agency's experience that investment and 
arbitrage (which are currently prohibited in the current rules) and 
speculative real estate (where someone builds a property with the 
intent to sell when completed) do not create a lasting community 
benefit. With regard to proposed Sec.  5001.7(m), properties to be used 
for commercial rental, not all such projects are ineligible. If the 
borrower has the authority to determine the tenants, then such a 
project would be eligible. The Agency will provide additional guidance 
in the handbook to the rule to further explain what is and what is not 
allowed under Sec.  5001.7(l).
    Comment: One commenter asked why water parks are no longer eligible 
projects under the Business and Industry program. Another commenter 
stated that golf courses have been great for community development in 
small communities, and that they would like to keep golf courses and 
other ``certain recreational facilities'' as eligible guaranteed 
purposes. The commenter added that these recreational facilities add to 
the quality of life for many rural citizens.
    Response: After considering these comments, the Agency believes 
that the restrictions proposed by this paragraph are too broad across 
all of the programs. The Agency has revised this paragraph in subpart A 
to address golf courses and other similar recreational activities. All 
of the other projects identified in the proposed paragraph (racetracks, 
water parks, ski slopes) have been moved in the rule to subpart B for 
the Community Facilities program. This revision addresses the one 
commenter's question concerning water parks, which would be eligible 
under the Business and Industry program in the rule. Golf courses, 
however, remain as an ineligible purpose for all programs because the 
Agency has determined that, based on past experience, these projects 
represent unacceptable risk in

[[Page 76731]]

comparison to the impact on the quality life for such rural community.
    Comment: One commenter noted that proposed Sec.  5001.7(c) would 
continue to disallow Business and Industry financing for businesses 
which receive 10% or more of their annual gross revenue from gambling 
activity. The commenter stated that State lottery programs are now 
widespread and are an accepted State Government revenue vehicle. The 
commenter also stated that many restaurants and recreational businesses 
receive significant lottery revenue, and it is a rare business that can 
afford to shun this State-authorized revenue source. The commenter 
recommended that ``Gambling'' should be defined to exclude State 
lottery programs, so that these otherwise-eligible businesses are not 
disqualified. Two other commenters also agreed that if a State allows 
and promotes a lottery, this should be allowed under Federal Business 
and Industry lending programs and the 10% requirement should be 
abolished.
    Response: The Agency agrees with the commenter that this paragraph 
needs to be revised to recognize that State-authorized lottery proceeds 
are an important source of income for otherwise eligible businesses. 
Because such proceeds are State-authorized, the Agency believes it is 
appropriate to modify this paragraph to accommodate State-authorized 
lottery proceeds and has provided an exclusion for such proceeds from 
the calculation of the ``10 percent from gambling proceeds.'' In 
addition, the Agency has incorporated an exemption for public bodies 
and for not-for-profit approved projects only, such that any other 
funds derived from gambling activity, as approved by the Agency, 
conducted for the purpose of raising funds for the approved project 
would also be excluded from the same calculation.
    Comment: Three commenters objected to Sec.  5001.7(e) prohibiting 
the guaranteeing of lines of credit. One commenter stated that making 
lines of credit eligible would likely significantly increase program 
usage, as there is a need for working capital. The commenter pointed 
out that it is not an automation issue, since FSA Farm Programs 
regulations permit guaranteeing lines of credit. The commenter also 
noted that those FSA loans generally perform well, but that additional 
regulatory and administrative guidance would be needed to implement. 
One commenter stated that cooperative lenders commonly provide their 
financing to coops as lines of credit rather than promissory notes and 
that USDA should, at the very least, try out this authority on a 
demonstration basis, limiting it to loans to cooperatives only at 
first. Another commenter stated that today a seven year term loan is 
used to support a guarantee of the operating needs of a company but 
that this structure is often not the most effective method; especially, 
when you have borrowers with large seasonal needs for operational 
credit. This commenter suggested that guarantees for lines of credit be 
approved for a specific time period, possibly three to five years, 
provided the line of credit renewal is within the previously approved 
guarantee conditions.
    Response: The Agency agrees with the commenters to the extent that 
lines of credit should be an eligible purpose under the Business and 
Industry loan guarantee program only. The Agency also believes that it 
is necessary to establish certain limitations on lines of credit. The 
rule, thus, has been modified to allow lines of credits as an eligible 
purpose under subpart B for the Business and Industry program.
    Comment: Three commenters expressed opposition to the elimination 
of finders', packagers', or brokers' fees from the eligible list of 
costs. These commenters stated that the Business and Industry program 
and many lenders work closely with these entities to match clients with 
appropriate capital sources.
    One of the commenters explained that intermediaries who understand 
and promote the guaranteed loan programs provided by Rural Development, 
are a valuable resource that should be utilized to continue promoting 
the programs as well as providing feedback to Rural Development. The 
commenter further stated that it is appropriate for Rural Development 
to pass on the ``reasonableness'' of those fees for each transaction 
and that the elimination of the fees would curtail the use of the 
programs in many parts of the country.
    A fourth commenter stated that broker fees should not be allowed in 
loan proceeds unless the broker agrees to sign a compensation agreement 
form (and signed under penalty of perjury), disclosing all fees 
received--before and after closing, from all parties relating to loan, 
including secondary market purchasers of guaranteed loans, and lenders. 
The commenter also explained that many brokers are making large fees 
while providing very little benefit.
    Finally, a fifth commenter recommended deleting finder's and 
packager's fees from the unauthorized projects and purposes list, as 
this is a way to refer quality projects to the program.
    Response: Currently, the Community Facility program does not allow 
these types of fees as part of the guarantee. The Agency believes this 
is a reasonable position for all guaranteed loan programs because the 
Agency believes that the interests of the programs are best served by 
guaranteeing the project and not those entities who ``bring us'' the 
project. The Agency notes that the rule does not prohibit these fees 
from being charged; they just cannot be part of the guaranteed loan.
    Comment: One commenter suggested expanding the language in proposed 
Sec.  5001.7(i) to specifically prohibit the financing of any illegal 
activity, and proposed the following language: ``Any business deriving 
income from illegal drugs, drug paraphernalia, or any other illegal 
product or activity.''
    Response: The Agency agrees with the commenters suggested language 
and has incorporated it into the rule.
    Comment: Six commenters stated their opposition to disallowing the 
use of loan proceeds to pay a judgment. One commenter explained that in 
rural areas of America they sometimes encounter a business that has had 
a credit problem, but it is a problem that is a one time occurrence and 
that they need the flexibility to be able to pay off judgments to help 
put deals together. Another commenter also mentioned that the payoff of 
tax liens should be permitted if it is a reasonable situation. One of 
the commenters stated that eliminating the payment of any judgment 
seems to be going too far and that this should be underwriting 
criteria, not eligibility criteria. The commenter also stated that if 
the judgment can be refinanced as part of a debt restructure, then it 
should be okay. One commenter stated that clearing a judgment as a part 
of a larger project can be of significant benefit to a rural business 
and help to continue or restore its economic contribution to its 
community.
    Response: As proposed, this paragraph would have prohibited the 
``payment of a judgment.'' In reviewing the proposed language and 
considering the commenters' concerns, the Agency believes that the 
proposed paragraph was too broad, prohibiting certain actions that 
could benefit both the borrower and the Agency. In the interim rule, 
this has been changed to ``The payment of either a Federal judgment or 
a debt owed to the United States, excluding other Federal loans.''
    Comment: Two commenters stated that they assumed that proposed 
Sec.  5001.70(j) means that guaranteed loan funds cannot be used to pay 
the applicant for rental of machinery and

[[Page 76732]]

equipment owned by the applicant, but that the language in the 
paragraph needs to be clarified.
    Response: The Agency has rewritten this paragraph (Sec.  5001.7(i) 
in the rule) to better express its intent, which is, as the commenters 
pointed out, that loan funds cannot be used to pay the borrower for 
rental of machinery and equipment owned by the borrower.
    Comment: Ten commenters were opposed to the disqualification of 
``properties to be used for commercial rental when the borrower has no 
control over tenants and services offered.'' These commenters provided 
numerous reasons why this provision should be removed, including:

--The Business and Industry program is the only guaranteed loan program 
that can be used for non-owner occupied purposes;
--Financing for retail centers and office buildings has been a very 
good market for rural lenders;
--It helps establish shopping centers, office condos, and other multi-
tenant properties in rural areas;
--Retail opportunities are born from such investments by developers;
--Such loans don't significantly add risk to the Agency;
--They support economic expansion and job creation in rural 
communities;
--Not all businesses can afford to build and renting is a good option 
to create vitality;
--There is a huge need for this type of commercial property in the 
rural areas;
--This provision will restrict the growth of infrastructure to be used 
in private enterprise in Rural America;
--It will take opportunities away from community banks, and put those 
in the hands of larger regional and national banks;
--Many rural areas lack suitable/modern commercial office space and the 
program helps to meet an important rural need; and
--The SBA cannot do these types of projects and therefore the use of 
funds is a good marketing tool for the Agency.

    Response: As noted in a previous response, the Agency has not 
revised this provision. The Agency believes that it is important that 
only those commercial properties over which the borrower has control of 
the tenants will be eligible for a loan guarantee. For example, if a 
borrower builds a property with the intent to sell (e.g., speculative 
real estate), this may be inconsistent with the purpose of the program. 
Further, where an owner does not have control over the tenants, this 
may result in tenants using the property for unauthorized purposes. The 
Agency will provide additional guidance on this provision in the 
handbook to the rule.
    Comment: One commenter recommended that Sec.  5001.7(o) include 
restrictions in accordance with the Consolidated Farm and Rural 
Development Act (the prohibition against disturbing wetlands) and the 
National Historic Preservation Act (the prohibition against 
``anticipatory demolition'').
    Response: The Agency does not believe that it is necessary to 
revise proposed Sec.  5001.7(o) (Sec.  5001.7(n) in the rule) to 
include restrictions associated with disturbing wetlands or 
anticipatory demolition because the rule already requires compliance 
with applicable Federal laws. Thus, the Agency does not believe it is 
necessary to include the suggestion here.
Borrower's Eligibility (Sec.  5001.8)
    Comment: One commenter urged the Agency to include a credit 
standard of eligibility in addition to the eligibility requirements in 
this section.
    Response: While the Agency agrees with the basic concern of the 
commenter, the provisions of Sec.  5001.8 are intended to be the most 
fundamental eligibility criteria applicable across all programs. The 
rule provides for assessing the credit worthiness of the borrower 
through the project eligibility criteria and through the lender's 
credit evaluation (Sec.  5001.16(b)), in which the lender applies 
credit standards and analysis to the borrower. Further, through the 
Agency's process for approving lenders for participation in this 
program, the reasonableness of the lender's credit analysis procedures 
is reviewed.
    Comment: One commenter stated that the mission of USDA programs is 
to assist rural communities and that the citizenship of owners should 
be irrelevant when the financing is for a fixed asset located in a 
rural area of the U.S. that will result in U.S. jobs created and 
retained in a rural area. The commenter recommended that a good 
solution is to add the provision, ``If the applicant does not fit this 
criteria, the guaranteed financing purposes must be limited to real 
estate improvements only.''
    Response: The Agency has decided to not change the citizenship 
requirement as suggested by the commenter, but to leave it as was 
proposed. The Agency believes that the language, as proposed, will 
ensure the returns realized on the investments in rural America stay 
within the U.S. The Agency points out that foreign entities can still 
participate in these guaranteed loan programs if they partner with 
domestic companies.
    Comment: One commenter recommended that Sec.  5001.8(b) be revised 
to include language requiring any owner with 20% or more ownership 
interest in the borrower to also comply. This would be consistent with 
agency implementation of the Debt Collection Act of 1996 (DCIA).
    Response: The Agency agrees with the commenter--that in order to be 
eligible not only must the borrower not be ineligible under the 
provisions of Sec.  5001.8(b), but that each of the borrower's owners 
with 20% or more ownership interest in the borrower must also not be 
found to be ineligible under the provisions of Sec.  5001.8(b). Such a 
provision is consistent with the DCIA. Thus, the Agency has revised 
this paragraph in the rule to reflect the commenter's recommendation.
Participation Eligibility Requirements (Sec.  5001.9) (Proposed Lender 
Eligibility Requirements)
    Comment: One commenter stated that the proposed standards have no 
relationship to Agency guaranteed loan making and servicing or to 
current published regulations and provide no basis for assurance of 
lender Agency guaranty loan making competence, regulatory compliance, 
or reduction of lender risk.
    Response: The Agency has made changes to the proposed rule in 
response to comprehensive public comments received that the Agency 
anticipates will improve the delivery of its guaranteed loan programs. 
These changes are most noticeable in the revised requirements for both 
approved lenders and preferred lenders, including, but not limited to, 
requirements associated with lender experience in similar loan 
guarantee programs. Thus, the Agency disagrees with the comment.
    Comment: One commenter recommended deleting the two categories of 
lenders to be created, because there is no real advantage to either the 
lenders or the borrowers. According to the commenter, the two 
application requirements only serve to confuse the lenders, borrower, 
and Agency staff.
    Response: As noted earlier in this preamble (see Changes to the 
Proposed Rule), the Agency has revamped the lender eligibility 
requirements such that there is only one type of lender (approved 
lender) for all programs except for the Business and Industry 
guaranteed loan program, and that approved lenders must submit ``full 
documentation'' applications. The

[[Page 76733]]

Agency is implementing a preferred lender program for the Business and 
Industry guaranteed loan program that provides distinct advantages. 
Thus, the Agency has made modifications to the proposed rule that 
address the commenter's concerns.
    Comment: Two commenters submitted comments on institution 
eligibility. One commenter recommended the inclusion of language 
requiring that a federally chartered entity submit applications and 
other required documentation to the state office in the state where it 
maintains its principal place of business. The other commenter 
suggested clarifying that all Farm Credit System institutions with 
direct lending and investing authority are eligible lenders for all 
four existing Rural Development guaranteed loan programs.
    Response: The Agency agrees with the two commenters that the rule 
needs to cover federally chartered entities. Therefore, the rule has 
been modified to state that state chartered entities are to submit 
applications and other required documentation to the State in which it 
is chartered. If the lending entity is federally chartered, then it is 
to submit the application to the State in which the entity's 
headquarters is located.
    The Agency disagrees with the comment that the rule needs to 
clarify that all Farm Credit institutions with direct lending and 
investing authority are eligible lenders. The rule language stating 
``Any regulated or supervised lender'' is sufficiently clear to provide 
that Farm Credit System institutions are covered by the provisions 
regarding eligible ``regulated or supervised lenders.''
    Comment: One commenter stated that the entire section needs to be 
rewritten. According to the commenter, USDA Rural Development should 
not become a bureaucratic reviewer of lenders' worthiness to make a 
guaranteed loan. The commenter stated that this would slow the Agency's 
response on every bank's first time use of the program and send the 
opposite message that should be sent. The commenter stated that USDA 
should be doing everything possible to simplify the process and speed 
up the process. The commenter also noted that requiring approval of 
every new lender will make the process appear to be bureaucratic and 
will definitely slow the process, discouraging use of the Business and 
Industry program by every regulated lender.
    Response: The Agency recognizes that requiring lender approval for 
participation in the guaranteed loan programs included in the rule adds 
a step to the process. However, the Agency believes that it is an 
appropriate step from the perspective of mitigating lender/
institutional risk. Therefore, the Agency rejects this comment.
    Comment: Two commenters addressed appeals. One commenter expressed 
opposition to a National Appeals Division and recommended that the 
final authority for guaranteed lending decisions rest with the Program 
Director. The ability to appeal should be restricted to the highest 
level of professional position rather than to a committee, which may be 
politically influenced. The other commenter stated that preferred 
lender eligibility should be a privilege rather than an absolute right, 
and that USDA should retain the non-appealable authority to determine 
that the conference of preferred lender status on any given lender is 
not in the Government's best interest.
    Response: The Agency has not revised provisions associated with 
appeals because the appeals process is statutorily-driven and the 
Agency cannot change it within the context of this rule. Similarly, the 
Agency cannot make the decision to deny a lender preferred status and 
determine that decision to be non-appealable within the context of this 
rule. Therefore, no changes have been made to the rule with regard to 
appeals.
    Comment: Two commenters suggested additional lender eligibility 
criteria. One commenter recommended that one criteria for both 
regulated and other lenders should be added--evidence of good standing 
with SBA and/or FSA's guaranteed loan programs if the lender has used 
either of their programs in the past two years.
    The other commenter requested that any approved traditional or 
nontraditional lender be required to meet the following requirements:
    (1) If not a credit regulated institution, the institution should 
be required to submit to Federal/State credit examination; and
    (2) The lender must show its ability to perform as a Lender of 
Record and to service, through the Loan Agreement (loans) or Trust 
Indenture (bonds) and through the history of the organization's past 
performance.
    Response: The Agency believes that the commenters' suggestions for 
evaluating lender eligibility are valid. In the application for lender 
approval, the Agency is asking for other guaranteed loan experience, 
which would identify any SBA and FSA guaranteed loan program experience 
that the lender may have. However, to ensure such information is 
provided, the Agency has revised the rule to require regulated and 
supervised lending entities with no outstanding Agency guaranteed loans 
and other lending entities provide other guaranteed loan experience, 
which would include any SBA and FSA experience. The Agency will also 
provide guidance in the handbook to the rule to assist program staff in 
evaluating such experience when reviewing lender approval applications.
    The Agency has also revised the rule to require that other lenders 
obtain an examination acceptable to the Agency. The Agency believes 
that such an examination will further mitigate the institutional risks 
associated with the program. The Agency will provide guidance in the 
handbook to the rule as to what examinations will be acceptable to it.
    Finally, the Agency believes that the requirement in the rule to 
provide the Agency information on the lender's credit management system 
and the information required in the lender's application (Form RD 5001-
1) are already sufficient for the Agency to assess a lender's ability 
to perform and to adequately originate and service guaranteed loans. 
Therefore, the Agency has not added any additional provision specific 
to this comment.
Loan Origination and Servicing Policies and Procedures
    Comment: Eight commenters provided comments on the submittal of 
lender policies and procedures. Two commenters suggested that not all 
lenders will be willing to submit a copy of their written policies and 
procedures for loan origination and servicing. One commenter also 
pointed out that some lenders may submit binders full of policy or 
provide reference to their websites, and that this requirement may not 
provide the expedited application review the Agency wants.
    Three commenters stated that adopting it would further deter new 
lenders from using the program. One commenter stated that this 
requirement would be very burdensome to the Agency and the lender. This 
commenter also suggested that it would create a number of separate 
eligibility criteria and exceed the Agency's expertise and stated 
mission.
    Another commenter stated that lender's credit and evaluation policy 
and procedures must be provided to the Agency. Banks credit policies 
are changed regularly and keeping up with changes would be impossible 
for the Agency.
    One commenter stated that there is no value to requiring lender's 
to submit origination and servicing policy; it just

[[Page 76734]]

serves to further restrict a lender's ability to manage these loans.
    Two commenters pointed out that current Business and Industry 
regulations do not include the requirement that if the lender's credit 
policies and procedures are more restrictive than Agency regulations, 
the more restrictive lender's policy shall be followed.
    Three commenters suggested that the requirements of the agencies 
that regulate lenders should be sufficient.
    One commenter stated that requiring a lender to supply its written 
policies and procedures to become an Agency approved lender is too 
burdensome on the lender and the Agency and serves no practical utility 
or purpose in guaranteed loan making. Instead, the commenter suggested 
that it serves the Agency more utility and efficiency that the lender 
adopts the Agency's regulations to the lender's existing credit 
policies and procedures and executes the Lender Agreement with the 
Agency that states so. According to the commenter, the Agency is not 
equipped to evaluate lender credit policies and procedures for 
commercial loans that do not relate to loan guarantees issued by the 
Agency.
    Response: The Agency has revised the rule to not require lenders to 
submit copies of their policies and procedures at the time of lender 
application. Instead, the rule requires lenders to submit a written 
summary of their loan origination and servicing policies and 
procedures. Such information is still important to the Agency in its 
evaluation of lenders for approval for participation in the program. 
Further, the Agency revised the rule (see Sec.  5001.15(d)) to require 
the lender to notify the Agency of any changes to its loan origination 
and servicing policies and procedures provided under Sec.  5001.9(a). 
In addition, if a lender makes any changes to its loan origination and 
servicing policies and procedures that are inconsistent with the 
requirements of this part, the lender is required to notify the Agency 
in writing and the lender must receive written Agency approval prior to 
applying the changes to loan guarantees under this part.
    Comment: One commenter stated that it is not unreasonable to 
request copies of lender credit policies and procedures. The commenter 
noted that there are over 1,400 lenders now participating in Rural 
Development guarantee loan programs who would be required, under the 
proposed rule, to present their credit policies and procedures to 
become a Rural Development approved lender and when a loan loss report 
is submitted. This requirement is burdensome to the lender and the 
Agency and adds no value to granting loans with guarantees, or 
mitigating what the Agency has referred to as ``institutional risk.''
    The commenter further stated that the Agency proposes to monitor 
over 1,400 credit policies and procedures, which serves no utility in 
loan servicing or guaranteed loan making. According to the commenter, 
the Agency is not qualified or experienced enough to monitor this 
requirement and that it will be virtually impossible for the Agency to 
monitor over 1,400 lender credit policies and procedures and compare 
them to the proposed rule for compliance.
    Response: In response to this and other related comments, the 
Agency has revised the rule to require lending entities seeking to 
participate in this program to submit a summary of their loan 
origination and servicing policies and procedures rather than copies. 
This will reduce the burden on the lenders and reduce the amount of 
material to be reviewed by the Agency. The Agency continues to believe 
that such information is important in considering lenders for approval, 
especially those who do not have guaranteed loan portfolios with the 
Agency, as one of many provisions for managing institutional risk.
    The Agency disagrees with the commenter's characterization that the 
Agency does not possess the necessary qualifications to assess a 
lender's policies and procedures for originating and servicing loans 
under this program.
    Comment: One commenter suggested changing the word ``participate'' 
to ``originate'' in the introductory language to Sec.  5001.9, which 
states that only lenders approved by the agency can participate in the 
program.
    Response: The Agency has not changed ``participate'' to 
``originate'' as suggested by the commenter because the word 
``participate'' covers both originate and service, which is what the 
Agency intends.
Regulated or Supervised Lenders
    Comment: Several commenters stated that regulated and supervised 
lenders should not have to submit an application for lender approval, 
while non-regulated lenders should receive scrutiny.
    One commenter stated that all federally regulated financial 
institutions should be approved by default. The commenter also stated 
that non-regulated lenders should receive heavy scrutiny.
    Another commenter stated that they believe that the non-traditional 
and non-regulated lenders are the only ones that should face an 
approval process from USDA. The commenter further stated that the 
automatic approval of all state and federally regulated commercial 
lenders should remain the way it is, but that it would be acceptable to 
require the extra approval process for the preferred lenders.
    Two commenters stated that regulated and supervised lenders should 
not need to submit an application to the USDA. One commenter pointed 
out that existing federal regulations cover such lenders already, and 
the other commenter stated that because the standards for approved 
lender status appear to be very simple, any regulated lender should 
qualify. The other commenter suggested that, in lieu of application, 
USDA should only ask for the written policies (and certificate of good 
standing) with the first application.
    One commenter stated that the current practice in the Business and 
Industry program requiring only non-traditional lenders to apply is 
sufficient; the requirement for regulated lenders to apply for 
participation is unnecessary and does not significantly reduce Agency 
risk. The commenter pointed out that the issue is suspending poor 
performing lenders rather than creating burdens for those not yet 
involved. The commenter also offered an alternative for reducing risk: 
Any lender with greater than 15% guaranteed loan portfolio delinquency 
(measured on September 30 each year) be suspended from new loan 
generation for 12 months. Standards for first-year or first-three-year 
delinquency and/or portfolio losses could also be promulgated.
    Response: The Agency disagrees that federally regulated financial 
institutions should be approved by default. As noted in a previous 
response, the Agency recognizes that lender approval adds a step to the 
process, but believes it is appropriate and prudent from a risk 
management perspective. In addition, the Agency has revised the rule to 
require other lenders to have undergone an examination acceptable to 
the Agency. The Agency believes that the rule provides sufficient and 
necessary requirements both for regulated and supervised lenders and 
for other lenders. Additional steps to become a preferred lender are 
included in the rule.
    With regard to the suggestion that the Agency rely on the 
evaluation of lender performance once a year and suspend those that 
fail to meet an acceptable level of performance in lieu of an initial

[[Page 76735]]

approval step, the Agency believes that removing the approval step 
places too much of the risk management after the fact. The rule 
incorporates provisions for maintaining approved and preferred lender 
status and these provisions address lender performance. By requiring an 
approval process up front, the Agency intends to reduce the number of 
lenders failing to meet acceptable performance later on. Thus, the 
Agency is retaining the lender approval process.
    Finally, one commenter suggested that, in lieu of a regulated or 
supervised lending entity submitting a lender approval application, the 
Agency should only ask for the written policies and certificate of good 
standing with the first application. The Agency agrees with the 
commenter for those regulated or supervised lending entities that have 
at least one outstanding Agency guaranteed loan. However, for the 
reasons stated above, the Agency continues to believe that regulated or 
supervised lending entities that do not have any outstanding Agency 
guaranteed loans need to go through an approval process, which the 
Agency views as an effective tool for managing risk. Therefore, the 
Agency has not accepted this specific suggestion with regard to 
regulated or supervised lending entities that do not have any 
outstanding Agency guaranteed loans.
    Comment: One commenter stated that Sec.  5001.9(a)(1) is redundant 
and can be removed, as it is restated in Sec.  5001.9(a)(1)(i) and 
(ii).
    Response: The Agency agrees that the text provided in this 
paragraph is redundant, but it is included in accordance with 
administrative policy. Therefore, the Agency has not modified this 
paragraph in response to this comment.
Application Content
    Comment: One commenter noted the requirement that a lender without 
an existing portfolio with Rural Development must submit an application 
for lender approval to the Rural Development State Office and asked 
what the application would consist of.
    Response: Lenders with no outstanding guaranteed loans would submit 
a lender's application to be approved for participation for the 
guaranteed loan programs included in this rule. This application 
requires the lender to provide:
    (1) General information on the lender such as name, tax 
identification number, and contact information;
    (2) A written summary of the lender's loan origination and 
servicing policies and procedures;
    (3) Evidence of good standing with its regulator; and
    (4) A description of its lending history and experience.
    Comment: One commenter questioned how the Agency will know if a 
lender is in good standing with its regulator.
    Response: The Agency will address the procedures it will use to 
determine if a lender is in good standing in the handbook to the rule.
    Comment: One commenter noted a typo in proposed Sec.  
5001.9(a)(1)(ii)--the word ``proved'' should be ``approved.''
    Response: The Agency has revised this proposed paragraph and making 
the correction is no longer needed.
Other Lenders
    Comment: Two commenters questioned the requirement the other 
lenders have an ``Agency approved line of credit that totals $5 million 
or more.'' One commenter stated that the language is not clear, as the 
Agency does not provide lines of credit to lenders. The other commenter 
recommended eliminating the requirement, as the requirement seems both 
vague and unnecessary.
    Response: The Agency agrees that it does not provide lines of 
credit to lenders and that the language in the proposed rule is 
unclear. The Agency does intend that lines of credit be suitable and 
necessary in order to demonstrate adequate sources of funds for funding 
and closing loans and they provide evidence that the lender has the 
necessary capital, resources, and funding capacity to successfully meet 
its responsibilities. In order to make this assessment, the Agency 
needs to review and consider the line(s) of credit available to the 
lender. For these reasons, the Agency is retaining the requirement for 
lines of credit, but has revised the language to make clear that the 
Agency is not providing lines of credit.
    Comment: One commenter noted the requirement that other lenders 
have liquid assets of at least $500,000 and requested that USDA provide 
a definition of ``liquid assets.''
    Response: The term ``liquid assets'' refers to cash and cash 
equivalents. The Agency will identify in the handbook to the rule what 
qualifies as liquid assets.
    Comment: One commenter stated that it is unfair to require other 
lenders with an existing USDA guaranteed loan portfolio to reapply for 
eligible status, and suggested that a simple approach paralleling Sec.  
5001.9(a)(1)(i) should be instituted instead.
    Response: The Agency believes that the risk management approach 
being implemented under the new rule is best served by requiring all 
non-regulated/non-supervised lenders to undergo the same approval 
requirements regardless of whether or not they have existing Agency 
guaranteed loan experience. Therefore, the Agency has not adopted the 
suggestion made by the commenter.
Guarantee Application Process (Sec.  5001.11)
    Comment: Five commenters provided comments on the pre-application. 
Three commenters noted that there is no definition of pre-application, 
and two commenters suggested that the pre-application be defined simply 
as a draft version of the lender's analysis and credit evaluation 
(i.e., a draft credit memo from the lender). Two commenters noted that 
there is no description of what material will constitute a pre-
application, and recommended using the pre-application material now 
required by the 7 CFR part 4279, subpart B.
    Response: The Agency agrees that a definition of ``pre-
application'' is needed and has defined a pre-application as 
``Information submitted to the Agency for which the applicant requests 
the Agency to make an informal assessment prior to submitting a full 
application. The information must be sufficient for the Agency to make 
a determination that the borrower and project are eligible.'' The 
Agency has intentionally not included the specific contents of a pre-
application because they may vary between programs and because the 
Agency prefers to work with the applicant on the basis of what they 
submit. Further, an applicant may seek an informal assessment for only 
a part of the project and to provide a prescriptive list of items that 
must be in a pre-application could discourage this. The Agency will 
provide guidance in the handbook to the rule to assist applicants as to 
what items should be included in a pre-application for each program.
    Comment: One commenter questioned the utility of submitting a pre-
application if the Agency is not going to render a favorable or adverse 
decision, noting that the purpose of the pre-application is to 
determine if the Agency will look favorably or unfavorably on a 
potential loan with a USDA guarantee. The commenter, therefore, 
recommended that this section be amended to include favorable or 
adverse decisions.
    Response: The pre-application is an optional tool available to the 
applicant to help provide feedback before

[[Page 76736]]

spending resources to submit a full application. If an applicant wants 
a formal determination, the applicant can still submit a full 
application without having submitted a pre-application. Therefore, the 
Agency has retained this provision.
    Comment: Three commenters expressed concern over the proposed Sec.  
5001.11(b)(2) that would allow the Agency to require a lender to obtain 
additional assistance in those areas where the lender does not have the 
requisite expertise to originate or service the loan. One of the 
commenters stated that, if the lender does not have the requisite 
expertise to originate or service the loan, they should not be an 
approved lender. The other two commenters stated that the regulator's 
chartering and monitoring process requires that lenders have 
origination and servicing experience, and that the Agency is 
overstepping its expertise and authority with this proposed regulation, 
thus further reducing the number of lenders waiting to participate. 
These two commenters also noted that current Business and Industry 
regulations do not address this issue.
    Response: It was not the intent of the phrase ``those areas'' to 
point to loan origination or servicing, as interpreted by the one 
commenter. The Agency agrees with this commenter that a lender's 
expertise in origination or servicing would be evaluated when the 
lender submits its lender's application (Form RD 5001-1) and if the 
Agency determined that the lender did not have sufficient expertise, 
the lender would not be approved.
    The intent of this provision was to take into account that some 
otherwise qualified lenders may seek to originate and service a loan in 
an area outside of their expertise and, in such instances, the Agency 
could require the lender to obtain additional assistance. What the 
Agency had in mind was that an approved lender may seek to originate 
and service a loan (1) the type and complexity of which (e.g., asset-
based financing) or (2) in an industry (e.g., renewable energy) in 
which the lender did not have experience or very little experience. 
Because of the lack of specificity of the proposed rule, the Agency has 
revised the rule to define ``those areas'' in which the Agency may 
require a lender to seek additional assistance.
    The Agency believes that the ability to require such additional 
assistance in these instances is consistent with the risk management 
approach of this rule. Therefore, the Agency has retained this 
provision in the rule.
    Comment: One commenter suggested editing Sec.  5001.11(b)(2) to add 
the following language to the end of the sentence: ``(e.g., 
environmental compliance).''
    Response: As noted in the response to the previous comment, the 
phrase ``those areas where the lender does not have requisite 
expertise'' is referring to the type and complexity of the financing 
and the industries with which the lender has little or no origination 
and/or servicing experience. There are other provisions in the rule 
that address the obligation of lenders with regard to environmental 
compliance. Furthermore, there are other obligations in addition to 
environmental compliance for which the lender is responsible. The 
Agency finds it neither necessary nor appropriate to refer to 
environmental compliance within this paragraph. Therefore, the Agency 
rejects this comment.
    Comment: One commenter suggested that proposed Sec.  5001.11(b)(2), 
which allows the Agency to require a lender to obtain additional 
experience, be deleted. The commenter pointed out that the Agency in 
the proposed rule has provided provisions for lender approval for an 
Agency Approved Lender and Preferred Lender designation and thus this 
paragraph has no utility and is burdensome to the lender. To the extent 
that the Agency has another level of concern not already addressed, the 
commenter suggested that the Agency should clearly state the concern 
and address it in the lender approval process.
    Response: The Agency cannot anticipate the level of expertise that 
a lender has for specific projects until the Agency reviews the actual 
application, and the determination of the lender's level of expertise 
for specific projects cannot be covered in the lender approval process. 
As part of its risk management approach, the Agency needs to have the 
ability to require the lender to obtain additional assistance in those 
areas where the Agency determines that the lender lacks the requisite 
expertise. For these reasons, the Agency rejects this comment.
    Comment: Four commenters expressed concern over the length of time 
that the application process takes. One of the commenters, noting that 
lenders get frustrated with how long it takes to get a Business and 
Industry application approved, suggested that the Agency include a 
paragraph that discusses the maximum length of time the application 
process will take. This commenter also suggested that a preferred 
lender should be guaranteed a short (3 to 5 days) turnaround time on 
any application they submit, and that this could be an incentive for 
lenders to become preferred lenders.
    One commenter stated that the proposed regulations do not address 
the USDA's long turnaround time (minimum of one month, but usually 
three to six months) and unfriendly lender atmosphere. Another 
commenter suggested that a decision on the loan application should be 
made by the Agency within 30 days. Another commenter said that 60 days 
for processing applications is too long and suggested that it should be 
reduced to two weeks at the State level and two weeks in Washington.
    Response: As noted in a response to a previous comment, the Agency 
has revised the proposed rule to incorporate a turnaround time for 
applications from preferred lenders (which under the rule only applies 
to the Business and Industry program). In the rule, the Agency will 
approve or disapprove complete applications from preferred lenders 
within 10 business days from the receipt of complete applications. The 
Agency believes that 3 to 5 days is too short to commit to even for 
preferred lender applications because of uncertainty associated with 
the availability and allocation of Agency resources.
    For applications from approved lenders that do not have preferred 
status, the Agency cannot incorporate a specific turnaround time 
because such applications will be more complicated (than from preferred 
lenders) and the amount of time to review such applications is 
dependent on the availability and allocation of Agency resources. 
Incorporating a specific timeline for such applications, even if it is 
as long as 30 days as suggested by one of the commenters, could 
encourage the Agency to deny applications before the deadline is 
reached, which could lead to the Agency not approving applications in 
the areas where they are most needed. For these reasons, the Agency has 
not incorporated a turnaround time for applications from approved 
lenders who do not have preferred status.
    Comment: One commenter addressed the issue of State Loan Committees 
and suggested revising the regulation to include the following 
language: ``Applications processed under this paragraph are exempt from 
any mandatory State Loan Committee review so long as the State Director 
has a written policy in place that incorporates a discretionary 
Committee certification for applications of $600,000 or less.''
    Response: The Agency agrees with the comment, but disagrees that it 
needs to

[[Page 76737]]

be addressed in the rule. Instead, the Agency will provide guidance in 
the handbook to the rule, which will note, in part, each program will 
make a determination as to whether or not have a loan committee. 
Therefore, the Agency has not revised the rule in response to this 
comment.
    Comment: One commenter stated that it believes there are 
significant benefits to be realized to both lender and the Agency by 
review and approval of the loan application prior to the issuance of 
the Conditional Commitment and, therefore, encouraged the Agency to 
study this issue further.
    Response: The Agency considered this issue and, as provided in the 
rule, loan applications submitted by approved lenders without preferred 
lender status will be reviewed by the Agency prior to issuance of the 
Loan Note Guarantee. For preferred lenders, while the Agency will not 
re-underwrite the lender's credit evaluation and determination, the 
Agency will review the loan applications for borrower and project 
eligibility prior to issuance of the Loan Note Guarantee.
Application for Loan Guarantee Content (Sec.  5001.12)
    Comment: One commenter noted that the process appears very 
cumbersome and without advantage to anyone other than the USDA. Another 
commenter said that the proposed preferred lender and approved lender 
with low documentation and full documentation makes the process more 
confusing. This commenter suggested that, if a lender wants to 
participate, it should be approved by the Agency and submit a full set 
of documentation for each loan requested.
    Response: In response to this and other comments, the Agency has 
revised the guarantee application requirements so that all approved 
lenders without preferred lender status submit ``full documentation'' 
guarantee applications. If a lender has preferred lender status, which 
in the rule is currently available only under the Business and Industry 
loan guarantee program, the rule requires a different content for the 
guarantee application. These changes simplify the rule and are 
consistent with rule provisions for managing risk.
    Comment: One commenter recommended that forms common to all four 
programs should be listed here, and program specific forms should be 
listed in their particular sections in subpart B.
    Response: The Agency recognizes the value of identifying the forms 
relevant to each of the four guaranteed loan programs, but it is not 
necessary to do so. Identifying the forms in the rule may require 
revising the regulation if any of the forms substantially change. 
Instead, it is the Agency's intent to identify the forms in the 
handbook to the rule rather than in the regulation. Therefore, the 
Agency has not incorporated the commenter's suggestion in the rule.
    Comment: One commenter suggested that after ``Environmental 
Information'' in Sec.  5001.12(a)(3) the following words be added: ``as 
required by 7 CFR part 1940, subpart G or 7 CFR part 1794, as 
applicable, and any future and succeeding Agency environmental 
regulation.'' The commenter made this suggestion for both the full 
documentation and low documentation guarantee loan applications. The 
commenter also suggested that this paragraph should be relocated to 
Sec.  5001.11(a) and the information be submitted with the pre-
application. The commenter noted that the environmental review needs to 
happen at the earliest time possible in the application process to 
avoid difficulties in loan processing.
    Response: The rule text referred to by the commenter states 
``Environmental information required by the Agency to conduct its 
environmental reviews (as required in Sec.  5001.16(h)).'' The cross-
referenced paragraph states, in Sec.  5001.16(h)(1): ``Provided the 
necessary environmental information to enable the Agency to undertake 
its environmental review process in accordance with subpart G of either 
7 CFR part 1940 or 7 CFR part 1794, or successor regulations, including 
the provision of all required Federal, State, and local permits.'' The 
rule, therefore, already addresses the commenter's suggestion and the 
Agency has not revised the ``environmental information'' paragraph for 
the loan guarantee application.
    With regard to the commenter's second suggestion concerning the 
placement of the environmental information in Sec.  5001.11(a) and its 
submittal with the pre-application, the Agency has not incorporated 
either suggestion. Under this rule, a pre-application provides the 
opportunity for a potential applicant to obtain an informal assessment 
from the Agency on the applicant's and project's eligibility and to 
comment on the pre-applications strengths and weaknesses. It is in the 
best interest of both the applicant and the Agency that environmental 
considerations be considered at the earliest point in the process at 
which such information becomes available. However, the Agency does not 
believe that such information should be a prerequisite to the 
applicant's submitting a pre-application. Therefore, the Agency has not 
incorporated this suggestion in the rule.
    Comment: One commenter suggested consolidating proposed Sec.  
5001.12(a)(4) and (7) into one item, and recommended that they be moved 
to Sec.  5001.104 because they only relate to the section 9006 program.
    Response: The paragraphs referred to by the commenter addressed 
technical reports and energy audits (Sec.  5001.12(a)(4)) and energy 
assessments (Sec.  5001.12(a)(7)). These requirements are not limited 
to the Rural Energy for America Program guaranteed loan programs. For 
example, similar types of projects could be funded under the Community 
Facilities guaranteed loan program. However, the Agency agrees that 
these three items can be combined into a single item and has done so in 
the rule.
    Comment: One commenter noted that the Form 10-K is now available to 
the general public online and that there is no need to require it from 
the lender or business as part of a complete application.
    Response: The Agency agrees with the commenter that it is not 
necessary to require submittal of a company's Form 10-K with the 
guaranteed loan application and has removed this requirement from the 
rule.
    Comment: Nine commenters commented on the proposed requirement to 
submit a copy of the loan agreement with the guaranteed loan 
application. One commenter stated that the draft loan agreement is 
redundant and unnecessary. This commenter added that most lenders use a 
standardized system for generating their primary documents, and if the 
USDA requires more than that, it can be placed in the document as an 
additional item in the standard Commercial Security Agreement.
    One commenter stated that USDA absolutely needs to get out of the 
practice of micromanaging the lender's loan agreement with its 
borrower. This commenter stated that if there are specific conditions 
that the Agency needs met, these should be spelled out in the global 
Lender's Agreement between the lender and USDA so that the lender knows 
what USDA's baseline requirements are whenever using USDA guaranteed 
programs. Beyond this, USDA as a guarantor should rely on its 
``approved'' and ``preferred'' lender partners to be able to craft a 
prudent, comprehensive loan agreement with the borrower.
    Three commenters stated that the draft loan agreement should be 
eliminated. One of these commenters stated that USDA should rely on its

[[Page 76738]]

lender partners to craft a prudent, comprehensive loan agreement with 
the borrower. The other commenter recommended that the financial 
covenants in the final loan agreement should be very limited, allowing 
more flexibility depending on the individual proposal. This commenter 
also noted that if the USDA continues to require specific covenants, 
the USDA agent should have the authority to decide when, which ones, 
and at what level.
    One commenter stated that the draft agreement seems like overkill, 
since 95% is boilerplate information. The commenter stated that USDA 
should ask for the other 5%, which basically means loan covenants.
    Two commenters said that this section should identify the minimum 
acceptable conditions for a loan agreement rather than waiting until 
the Conditional Commitment is issued.
    One commenter said that there should be no USDA loan agreement 
review. Instead, USDA should lay out specific conditions, covenants, or 
requirements to be included in the loan agreement. Another commenter 
stated that the loan agreement requirement should be carefully reviewed 
and should not include absolute requirements that are not always 
applicable. Another commenter suggested that it would be beneficial for 
the review and approval of the loan documentation following USDA 
approval to allow the inclusion of any USDA requirements.
    Response: Overall, the Agency agrees with the commenters that it is 
not necessary to require a copy of the loan agreement between the 
borrower and the lender when the guarantee loan agreement is submitted. 
The Agency further agrees that lenders approved to participate in the 
guaranteed loan programs under this part have the experience and 
expertise to produce loan agreements to acceptable industry standards 
and, therefore, the Agency does not believe it is necessary to provide 
within the rule an itemization of the minimum requirements of a loan 
agreement acceptable to the Agency. (The Agency may elect to provide 
such information in the handbook to the rule.) Instead, the Agency 
agrees that the proper time to review the loan agreement is prior to 
loan closing.
    Comment: Three commenters addressed appraisals. Two commenters 
suggested that allowance should be provided for USDA approvals to be 
issued subject to an acceptable appraisal being obtained and reviewed 
before issuance of the USDA guarantee. Another commenter suggested that 
appraisals should be a contingency of a Conditional Commitment rather 
that being required to be submitted with the application.
    Response: The Agency continues to believe that appraisals 
acceptable to the Agency should be submitted with the guaranteed loan 
application, but recognizes that the guaranteed loan application 
process can move forward in their absence. Therefore, the Agency has 
kept this requirement, but conditioned it based on the appraisal being 
available. If the appraisal is not available at the time the guaranteed 
loan application is submitted, the lender must submit the complete 
appraisal to the Agency before loan closing.
    Comment: Nine commenters provided comments on the business plan 
requirement in proposed Sec.  5001.12(a)(9). Six commenters did not 
recommend requiring a business plan (especially for existing 
businesses), and four commenters suggested that the lenders should 
decide if they need to see a business plan for their credit evaluation. 
One of these commenters also stated that for startups, the business 
plan and feasibility study should be combined. One commenter said that 
this requirement will only serve as a deterrent to the loan program.
    Two commenters said that for existing businesses, a business 
history, budget, and projections should be enough.
    Two commenters stated that the Agency should say what it expects to 
be in a business plan, and suggested adding a reference to the 
definition section for business plan so that the financial statements 
described in the definition are included.
    Response: The Agency has left intact the requirement that a 
business plan be included with the guaranteed loan application, 
although a separate business plan does not need to be submitted if the 
information required in the business plan is included in the 
feasibility study (as was proposed) or in the lender's analysis (as 
added in the rule). The Agency continues this provision for existing 
businesses because existing businesses may be expanding into new areas 
and/or markets, in which case the business' history, budget, and 
projection may not be sufficient to evaluate the borrower.
    As noted above, the rule does not require a separate business plan 
if the information is contained in the lender's analysis. This 
addresses commenters' suggestion that the lender be responsible for 
deciding if a business plan is needed.
    Finally, there is no need to add a cross-reference back to the 
definition of ``business plan.'' When a term is used in the rule and 
that term is defined in the definitions section of the rule, then that 
term has that meaning regardless of whether or not there is a cross-
reference back to the definitions section. The Agency does not intend 
to insert such cross-references for the defined terms in this rule.
    Comment: One commenter stated that a feasibility study should not 
be a standard requirement, but should be required only on an as-needed 
basis, to be determined by the lender based on the nature of the 
project. This commenter also noted that feasibility studies are not 
typical in the small business lending industry underwriting process.
    Another commenter stated that the requirement for a feasibility 
study or analysis should remain a requirement. The specific type, scope 
of work, and preparer should remain the lender's responsibility to 
propose and obtain with Agency concurrence.
    Response: The Agency has elected to retain in subpart A the 
identification of a feasibility study as part of the guarantee loan 
application and use subpart B to identify whether a specific program 
requires it (as under Sec.  5001.104) or may require it (as under 
Sec. Sec.  5001.101, 5001.102, and 5001.103). Thus, the rule does not 
make it a ``standard'' requirement and it will be required only to the 
extent identified in subpart B for a specific program.
    Comment: Five commenters provided comments on the Affirmative Fair 
Housing Marketing (AFHM) plan in proposed Sec.  5001.12(a)(11). One 
commenter noted that this requirement is currently used by the U.S. 
Department of Housing and Urban Development and that it is a timely/
difficult report.
    One commenter noted that the proposed rule requires the AFHM plan 
for for-profit nursing homes or assisted living center, and questioned 
whether it is required for non-profit facilities of this type. The 
commenter also noted that presently the AFHM plan is required for these 
type of facilities regardless of the profit type. Another commenter 
recommends deleting the requirement for for-profit facilities.
    One commenter stated that this requirement is duplicative and 
unnecessary, and noted that because in all Business and Industry loans 
and in the Conditional Commitment, the borrower must certify compliance 
with Equal Employment Opportunity and Civil Rights law, the requirement 
is already in place. Another commenter also stated that because this 
requirement is already handled through compliance with Civil Rights 
laws, etc., the proposed requirement should not be part of the 
guaranteed loan program,

[[Page 76739]]

and that it would be an extra burden on the lenders and duplicate what 
they already have to do as lenders.
    A sixth commenter suggested that the Agency insert the phrase ``to 
the extent that state or Federal statute requires this certification''.
    Response: This rule implements requirements already established by 
Rural Development under 7 CFR Sec.  1901.203(c)(2)(i), which applies to 
all Rural Development programs involving housing, which includes both 
profit and not-for-profit housing. If the requirements associated with 
7 CFR part 1901, subpart E are to be changed, it would occur under 
another rulemaking, not this one. Therefore, the Agency has retained 
the requirement for the AFHM plan in the rule.
    The Agency, however, has revised proposed Sec.  5001.12(a)(8) 
because, as noted in the above paragraph, the requirement for the AFHM 
plan applies to both profit and not-for-profit housing. The revision 
deletes the reference to ``for profit'', and makes reference to nursing 
homes and assisted-living centers as being included under residential 
units (``residential units, including nursing homes and assisted-living 
centers'').
    The Agency notes that the requirement for preparing the AFHM plan 
is borne by the borrower and not the lender. Thus, it is not a burden 
on the lender. In addition, the AFHM plan is a marketing tool whose 
purpose is to promote the project in order to have people move into the 
housing and makes underserved and minority populations aware of the 
project. The AFHM plan is required by legislation separate from 
applicable Equal Employment Opportunity and Civil Rights regulations.
    Finally, because the requirement for the AFHM plan is based on 7 
CFR part 1901, subpart E, the Agency rejects the suggestion to add the 
phrase ``to the extent that state or Federal statute requires this 
certification.''
    Comment: Three commenters commented on the proposed requirement to 
submit a preliminary engineering report with the guaranteed loan 
application. One commenter stated that this requirement should be moved 
to Sec.  5001.101 because it is only related to the water and waste 
disposal guaranteed program. Another commenter recommended deleting the 
requirement for a preliminary engineering report for all new 
construction. The third commenter stated that the engineering report 
should only be required for projects where the technology and 
engineering is not an industry standard or has sufficient historical 
applications.
    Response: In consideration of these comments, the Agency has 
elected to delete reference to preliminary engineering report (PER) 
from subpart A and the rule only references it in subpart B with 
respect to the water and waste disposal guaranteed program. As 
additional guaranteed loan programs are added to this part, the Agency 
will place any PER requirement in subpart B as appropriate.
    With regard to the suggestion that this requirement be deleted for 
all new construction, the Agency first notes that the rule is 
consistent with the current implementation of the water and waste 
disposal guaranteed loan program. It is not the Agency's intent to 
deviate from the current implementation of the program because, as a 
matter of Agency policy and experience, the PER is invaluable in 
ensuring that the engineering principles are sound and that viable 
alternatives have been considered.
    Finally, with regard to the suggestion that the PER only be 
required for projects where the technology and engineering is not an 
industry standard or has sufficient historical applications, the Agency 
disagrees that the PER should not still be prepared and submitted. Even 
in these situations, the PER allows the Agency to evaluate possible 
alternatives and helps determine eligible project costs. The complexity 
of the PER depends on the complexity of the project. Thus, those 
projects that meet industry standards or have historical applications 
could be less complex and require less time to prepare. But in all 
instances, the PER still provides value to the Agency in evaluating the 
guaranteed loan application.
    Comment: One commenter suggested adding the following language to 
proposed Sec.  5001.12(a)(13): ``Current credit reports or equivalent 
on the applicant and any parent, affiliate, and subsidiary firms, and 
other persons or entities liable for the debt, except for public 
bodies; and.''
    Response: The proposed rule stated, in part, that current credit 
reports or equivalent would be submitted for ``any other person liable 
for the debt.'' The phrase ``any other person'' includes, but is not 
limited, to those entities identified by the commenter (i.e., parent, 
affiliate, and subsidiary firms). Therefore, it is unnecessary to 
revise the provision as suggested by the commenter. To the extent that 
the Agency determines it useful, the Agency will clarify ``any other 
person'' in the handbook to the rule.
    Comment: Eleven commenters recommended deleting proposed Sec.  
5001.12(a)(14), Audited financial statements. One commenter noted that 
requiring an audit for more than $1 million would be punitive. Five 
commenters noted that audited financials are expensive. One commenter 
said that it was not necessary and was a bad idea, and another 
commenter said it was inappropriate. Two commenters said that $1 
million is a ``ridiculously low level'' at which to require audited 
statements. Six commenters stated that it should be up to the lender. 
One commenter stated that the change from an independent accountant 
prepared statement to an audited financial statement would severely 
limit the number of companies who would be eligible for the program, 
and two commenters said that the proposed requirement would be 
detrimental to the program. One commenter said inclusion of this 
requirement would be a significant hindrance to the Agency's ability to 
support many of its current borrowers.
    Response: The Agency has considered these comments and has made 
revisions to this requirement to differentiate between startup 
businesses and existing businesses. For borrowers that have been in 
existence less than one year, the Agency revised this requirement by 
eliminating the threshold and requiring the submittal of the most 
recent ``Agency-authorized financial statements'' of the borrower 
regardless of the amount of the guaranteed loan request. For borrowers 
that have been in existence for one or more years, the Agency raised 
the threshold from $1 million to $3 million at which audited financial 
statements would be required and has added a provision that would allow 
the submittal of alternative financial statements provided such 
statements have been authorized by the Agency. For borrowers that have 
been in existence for one or more years that request guaranteed loans 
of less than $3 million, the most recent audited or Agency-acceptable 
financial statements of the borrower would be submitted. The Agency 
believes that these revisions address most of the concerns expressed by 
the commenters while maintaining the Agency's intent in this rule to 
manage risk.
    Comment: Nine commenters suggested different threshold levels for 
when audited financial statements would be required. One commenter 
suggested that the minimum should apply to loans over $3.0 million. 
Five commenters suggested audited statements for loans over $5 million.

[[Page 76740]]

Two commenters suggested audited statements for loans over $10 million.
    One commenter stated that audited statements make sense only for 
loans of over $5 million because reviewed statements are good for 
$3,000,000 to $4,999,999, and statements prepared by certified public 
accountants are good for $1.00 to $2,999,999. Another commenter 
suggested review statements for loans under $5 million.
    One commenter stated that current regulations have a floor of $3 
million for certified financial statements which has been cost 
prohibitive for small business owners. The commenter expressed concern 
that lowering the floor, as in the proposed rule, will make this very 
problematic and should be eliminated. The commenter recommended that 
the Agency consider CPA reviewed financial statements for all loans 
under $5 million and that all financial statements must be prepared in 
accordance with GAAP.
    Response: The Agency considered the suggestions made by the 
commenters as to an alternative, higher threshold at which audited 
financial statements would be required. Among other changes concerning 
the submittal of financial statements, the Agency has raised the 
threshold from $1 million to $3 million. The Agency is concerned that 
raising this threshold to a higher limit ($5 million or $10 million) 
may unnecessarily result in increased risk.
    Comment: Eleven commenters suggested alternatives to requiring 
audited financial statements. Two commenters recommended retaining the 
current regulation whereby the USDA may require annual audited 
financial statements after the Business and Industry guaranteed loan 
closes. These commenters also stated that the intention of the proposed 
regulation is unclear, and that if the intention is to require 
applicants for loans over $1 million to have audited financial 
statement for prior years, this will severely impact many otherwise 
good credit worthy potential rural businesses that need Business and 
Industry guaranteed loans.
    One commenter recommended returning to the requirements in the old 
7 CFR part 4279, subpart B regulation which called for a current 
balance sheet; and projected balance sheets, income and expense 
statements, and cash flow statements for the next two years. Existing 
businesses must also submit balance sheets and income statements for 
the three previous years. This commenter also noted that the lender's 
policies may require the applicant to provide more, but suggested that 
the Agency not impose additional requirements, including GAAP prepared 
financials.
    Four commenters suggested requiring tax returns. These commenters 
stated that they are now the most widely used financial tool in 
business banking and that they are the only financial statement that is 
uniformly and consistently available from all businesses. One of the 
commenters added that they are the common statement used in 
underwriting owner-occupied real estate loans.
    Two commenters pointed out that 99 percent of for-profit businesses 
that will apply do not have audited financial statements, and will not 
go through the expense of an audit to apply for a Business and Industry 
guarantee. These commenters suggested that the requirement for for-
profit businesses should be for ``accountant prepared financial 
statements'' and added that the statements should be ``completed in 
accordance with Generally Accepted Accounting Principles.'' Another 
commenter also supported requiring accountant prepared financial 
statements for for-profit businesses.
    Response: As noted in previous responses to comments on financial 
statements, the Agency has revised this provision to allow for the 
submittal of Agency-authorized financial statements for all businesses 
that have been in existence for less than one year regardless of the 
amount of the guaranteed loan request. For businesses that have been in 
existence for one or more years seeking a guaranteed loan size that is 
less than $3 million, the Agency revised the rule to allow such 
borrowers to submit either the most recent audited or Agency-acceptable 
financial statements of the borrower. In such situations, the types of 
financial statements identified by the commenters may be acceptable to 
the Agency, which will work with the lenders on a case-by-case basis. 
However, for guaranteed loans of $3 million or more from businesses 
that have been in existence for one or more years, the Agency believes 
that requiring audited financial statements (unless alternative 
financial statements are authorized by the Agency) is reasonable 
relative to the potential risk associated with such guaranteed loans.
    Comment: One commenter stated that the Agency's annual audits 
requirements were inconsistent and atypical of lender's requirements. 
The commenter questioned why, if only annual audits are needed for risk 
projects over $3 million, up front audits are needed for a sound 
borrower and a $1 million project.
    Response: The Agency has revised, among other changes, the level at 
which audited financial statements are required to be submitted with 
the guaranteed loan application to $3 million. As noted in responses to 
other related comments, the Agency has removed the requirement for 
annual audited statements for projects over $3 million and has replaced 
it with a requirement for the submittal of financial reports, either as 
required by the lender's regulatory authority if the lender is 
regulated or supervised or as contained in the Conditional Commitment 
if the lender is an other lender (see Sec.  5001.17(d), Financial 
reports).
    Comment: One commenter noted that no allowance is made for startup 
businesses where there would be no audit available.
    Response: The Agency agrees with the commenter and has revised the 
rule to allow borrowers in existence less than one year, which includes 
startup businesses, to submit ``Agency-authorized'' financial 
statements.
    Comment: One commenter suggested that the full documentation 
guarantee application should also include the following items: Complete 
organizational documents of the borrower, list of governing board 
members of the borrower, community support documentation, historical 
financial statements of the borrower, State Clearinghouse/
Intergovernmental Review comment letter, copies of any existing or 
proposed lease, management agreement, or other applicable legal 
documents involving the borrower and the proposed facility, and the 
lender's letter on the need for the guarantee.
    Response: The Agency has considered each suggested item for 
inclusion in a full documentation application, which corresponds to an 
approved lender application in the rule (see Sec.  5001.12(a)), and has 
made the following determinations.
    With regard to the submittal of complete organizational documents 
of the borrower, the Agency as a matter of policy has determined that 
these documents are needed in verifying if a borrower is a non-profit 
and has the authority to engage in obtaining the loan. Of the four 
programs included in the rule, such documents are relevant to the 
Community Facility and Water and Waste Disposal programs, but not to 
the other two programs. While Form RD 5001-3 requires lender 
certification to the borrower's authority to obtain a loan, the Agency 
has determined that it is necessary to ensure these organizational 
documents are obtained for the Community Facilities and the

[[Page 76741]]

Water and Waste Disposal programs. Therefore, the Agency has added this 
as a requirement in subpart B for both programs.
    With regard to the list of governing board members of the borrower, 
such information is needed to determine whether a facility is locally 
controlled. This is important to the Community Facility and the Water 
and Waste Disposal programs, but not to the other two programs under 
the rule. Therefore, the Agency has added this as a requirement in 
subpart B for both programs.
    With regard to community support documentation, Form RD 5001-3 
requires the lender to certify that the borrower has obtained a 
certificate of support. Lender certification is sufficient to meet the 
needs of the Community Facilities and Water and Waste Disposal programs 
and, thus, there is no need to require submittal of such documentation 
with the loan guarantee application.
    With regard to historical financial statements of the borrower, if 
the Agency determines that the financial statements in Sec.  
5001.12(a)(10) are insufficient to properly assess the viability of an 
individual project, the Agency may at its discretion request additional 
financial information (see Sec.  5001.12(a)(10)(iii)).
    With regard to State Clearinghouse/Intergovernmental Review comment 
letter, the requirement to submit such a letter is covered under USDA's 
Office of the Chief Financial Officer regulations in 7 CFR part 3015, 
subpart V. This requirement is applicable to this rule under Sec.  
5001.16(g), which requires compliance with ``applicable Federal laws.'' 
Therefore, the Agency has not included this item as a separate line 
item for applications. However, the Agency recognizes that this letter 
is not very well known and will address this issue in the handbook to 
the rule.
    With regard to copies of any existing or proposed leases, the rule 
allows the Agency to request any additional information it determines 
is necessary to evaluate the application (Sec.  5001.12(a)(11)). Thus, 
while Form RD 5001-3 contains a provision to address the relationship 
between the length of the loan and the length of the lease (e.g., to 
ensure that the lease is longer than the loan term), if the Agency 
determines that additional information is needed to properly assess the 
lease, the Agency may request that the lender provide a copy of the 
lease under this provision of the rule. The Agency will provide 
guidance in the handbook to the rule as to the circumstances under 
which it might request a copy of the lease.
    With regard to a management agreement and other applicable legal 
documents involving the borrower and the proposed facility, the Agency 
agrees that submittal of such agreements, where applicable, is useful 
to ensure that a for-profit company does not receive the benefit of 
Federal government subsidized funds. This suggestion is applicable to 
the Community Facilities and the Water and Waste Disposal programs and 
has been provided for in subpart B for both programs.
    Finally, with regard to the lender's letter on the need for the 
guarantee, Form RD 5001-3 addresses through the lender's certification 
the need for the guarantee. Therefore, there is no need to add this as 
a separate item to the application.
    Comment: One commenter recommended that non-preferred lenders 
submit a complete application package for all loans and a full loan 
package should be required for all loans above $5 million.
    Response: The Agency has revised the rule, as discussed in 
responses to other related comments, such that all non-preferred 
lenders must submit full documentation applications regardless of the 
size of the loan. For preferred lenders, which would only be allowed 
under the rule for the Business and Industry guaranteed loan program, 
the Agency is requiring a different set of application requirements to 
be submitted regardless of loan size.
    Comment: One commenter noted that many of the application 
requirements refer the reader to subpart B. This commenter suggested 
that each section in subpart B should have its own application section 
so that they can be program specific without having the reader flipping 
around the regulation.
    Response: The Agency intentionally developed the new platform to 
improve the administrative efficiency of adding new programs to the 
rule, recognizing that this format would require readers to consider 
requirements for a single program in both subpart A and subpart B of 
the rule. The Agency will provide implementation materials and 
application guides in which the requirements of the rule will be 
presented in a manner as suggested by the commenter.
Low Doc Applications (Proposed Sec.  5001.12(b))
    Comment: The Agency received a number of comments pertaining to low 
documentation applications, including the lack of significant 
differences and relief between low documentation and full documentation 
applications, the potential for abuse, and the importance of full and 
careful review of all applications.
    Response: The Agency has removed low documentation applications 
from the rule. The requirements contained in the rule are those 
necessary to ensure applications are adequately evaluated and these 
comments are no longer relevant.
Determination of Documentation Level (Proposed Sec.  5001.12(c))
    Comment: The Agency received a number of comments on the 
determination of documentation level for existing businesses in the 
context of low documentation applications, including loan amount 
threshold, credit criteria for preferred and non-preferred lenders, 
debt coverage ratios, equity requirements, and loan to value ratio.
    Response: As noted above, the Agency has removed low documentation 
applications from the rule. The requirements contained in the rule are 
those necessary to ensure applications are adequately evaluated and 
these comments are no longer relevant.
Lender Responsibilities--General (Sec.  5001.15)
    Comment: After noting the manner in which the proposed rule 
attempts to manage risk to the Agency, one commenter suggested placing 
the burden of risk management on those with the expertise to do so 
(i.e., on the lenders) because, while financial and other criteria as 
part of project eligibility will assist in identifying risk, 
experienced lenders have a good understanding on how to mitigate an 
identified risk.
    Response: As discussed in the preamble to the proposed rule, the 
new platform for guaranteed loans addresses four types of risk--loss 
exposure, project risk, institutional risk, and operational risk. One 
of the key components in managing risk is to ensure that applications 
for projects that will repay their loans are submitted by the lender. 
While the Agency ultimately approves or disapproves the guarantee, the 
rule relies on the lender's experience and expertise to originate such 
loans. Further, under the rule, preferred lenders are afforded more 
responsibility in loan origination as Agency review of loans from 
preferred lenders is limited. The rule also relies heavily on the 
lender's servicing policies and procedures for monitoring loans and for 
taking corrective actions when necessary for loans that start 
experiencing problems. In sum, the rule employs provisions that manage 
risk using both Agency and lender expertise

[[Page 76742]]

and experience. The Agency believes it has struck an appropriate 
balance between responsibilities to ensure minimizing losses in the 
Agency's guaranteed loan portfolio.
    Comment: One commenter stated that, to the extent that the Agency's 
action or inaction created a loss, the lender should be compensated 
accordingly to the extent that the lender continued its 
responsibilities to originate and service the loan.
    Response: The Agency understands the commenter's concern that there 
are actions or inactions that the Agency may take that could result in 
a loss to the lender. For example, collateral value could degrade while 
the Agency is making a determination. However, there are statutory 
constraints, as contained under the Consolidated Farm and Rural 
Development Act, that prohibit the Agency from implementing a provision 
as suggested by the commenter. While the lender has the right to pursue 
an appeal of a loss claim if it disagrees with the loss claim payment, 
the Agency cannot establish a separate category of loss claims 
associated solely with alleged agency action or inaction. Therefore, 
the Agency has not revised the rule as suggested by the commenter.
    Comment: One commenter recommended adding the following language: 
``Guaranteed loans must be properly classified. Within 90 days after 
the Agency issues the Loan Note Guarantee, the Lender must notify the 
Agency of the loan's classification or rating under its regulatory 
standards. The Lender must also notify the Agency when there is a 
change in the original loan classification.'' The commenter then asked 
``If this is not published, how will the lender be required to notify 
the Agency of the loan classifications?''
    Response: In response to this and other related comments, the 
Agency has revised the rule to require the lender to notify the Agency 
of a loan's classification no later than 90 days after loan closing 
(see Sec.  5001.16(a)(2)), and to notify the Agency within 15 calendar 
days of when a loan's classification has been downgraded (see Sec.  
5001.4(b)(3)(iii)). As noted in a response to another comment, the 
Agency does not believe that it is necessary to report all changes in a 
loan's classification, just those that result in a downgrade. Finally, 
the loan classifications that would be used to classify guaranteed 
loans will be identified in the handbook to the rule. The Agency does 
not believe there is any utility in incorporating those classifications 
in the rule.
Lender Responsibilities--Origination (Sec.  5001.16)
    Comment: One commenter stated that it is better for the Agency to 
have its own underwriting standard and administer that exclusively.
    A second commenter also suggested that the Agency set its own 
reasonable standards and accept projects that meet the Agency's 
standards even though it might be outside the lender's normal credit 
criteria. This is a valid reason for a lender to seek a government 
guarantee.
    A third commenter stated that the Agency is establishing more 
stringent eligibility requirements under the program that are unfair 
and will not achieve the Agency's desired goal. According to this 
commenter, the proposed rule will not reduce the Agency's so called 
``institutional risk,'' but will instead create unpublished standards 
of metrics for Agency program eligibility, credit evaluation, 
servicing, and liquidation that discriminates against those lenders 
with tighter credit standards. Therefore, this commenter recommended 
that the Agency:
    (1) Establish clear credit evaluation and loan servicing standards 
that it expects from lenders,
    (2) Hold the lenders accountable to those standards as a reasonable 
and prudent lender, and
    (3) Mandate that all lenders adopt the Agency's regulations as part 
of their written policies and procedures after the proposed rule and 
credit evaluation standards are established in order to ensure 
compliance.
    A fourth commenter stated that the Agency should have its own 
credit policies that it follows regardless of the lender's credit 
policies. The commenter pointed out that typically a guarantee is 
needed because there are exceptions to the lender's credit policy and a 
guarantee mitigates the risk allowing for the credit to be approved and 
then stated that if the Agency reverted to the lender's credit policy, 
it would not be able to approve the guarantee because there would be 
exceptions to the credit policy.
    Response: The Agency has intentionally not tried to create a 
comprehensive set of requirements to cover all aspects of loan 
origination and servicing under this program, because, in part, the 
Agency does not believe that a comprehensive set of standards can be 
established to fit all guaranteed loans (one size does not fit all). 
Instead, the Agency is setting specific minimum standards in certain 
areas it has determined important to managing risk for the loans it 
will guarantee under this program. Further, for the reasons stated in 
the preamble to the proposed rule, the Agency intends to leverage 
lender experience in originating and servicing loans and to do so using 
those policies and procedures with which they are most familiar (i.e., 
their own) and that are satisfactory to their regulators. This provides 
a flexibility for the individual loan programs as well as for the 
lenders seeking to participate in the program and allows the lender to 
develop case-by-case analyses for individual projects.
    Comment: One commenter suggested that, as an alternative, the 
Agency should mandate that all Rural Development approved lenders, 
preferred lenders, and approved non-regulated or supervised lenders 
include Agency loan origination, servicing, and liquidation servicing 
regulations into their origination policies and procedures in use by 
the lender to level the playing field. This should be included in the 
Lender Agreement, Conditional Commitment, and Lender Certification 
given at loan closing. According to the commenter, this will eliminate 
the burden of monitoring lender credit policies and procedures, and 
create more time for Agency personnel to devote to approving more loan 
guarantees.
    Response: First, the Agency believes that setting the standards it 
has in this rule sufficiently levels the playing field to help ensure 
that risk is being mitigated across all loans that are originated and 
serviced under this program. The Agency does not believe that it is 
necessary that each loan and its accompanying documents require the 
same exact set of conditions, policies, and procedures in order to 
ensure its likelihood of repayment.
    Second, the Agency expects lenders to monitor all loans guaranteed 
under this program in accordance with their policies and procedures as 
they would any other loan they make. The lender is required to notify 
the Agency of changes in a loan's status (any downgrades). Further, the 
rule requires lenders to notify the Agency of any changes to those 
policies and procedures and, where the change is inconsistent with the 
requirements of this rule, the lender must notify the Agency in writing 
and receive written Agency approval prior to applying the changes to 
loan guarantees under this part. This places the primary responsibility 
on the lender and allows the Agency to more efficiently allocate its 
resources.
    Comment: One commenter noted that the SBA currently requires in the 
bank note that it would not do the deal without the government 
enhancement. The commenter recommended that the

[[Page 76743]]

USDA program should match this SBA requirement.
    Response: The Agency agrees that the issue raised by the commenter 
needs to be addressed in this program. In Form RD 5001-3, item 2 under 
the Community Facility sheet and item 2 under the Water and Waste 
Disposal sheet require the lender to indicate whether or not the lender 
is willing to provide financing for the project at reasonable rates and 
terms without the reduced risk derived from the USDA loan guarantee. 
The Agency believes this sufficiently addresses the commenter's 
suggestion.
    Comment: One commenter made two suggestions of language that should 
be added:

--``The lender is primarily responsible for determining credit quality. 
Lenders are responsible for developing and maintaining adequately 
documented loan files, recommending only loan proposals that are 
eligible and financially feasible, following Agency regulations, and 
performing a thorough credit evaluation addressing all credit factors. 
The lender is required to have an adequate underwriting process to 
ensure that loans are reviewed by a qualified loan officer other than 
the originating officer. The Agency relies upon the lender to perform 
these and other credit evaluation responsibilities outlined in the 
regulations.''
--``Lenders are responsible for obtaining valid evidence of debt and 
collateral in accordance with sound lending practices.''

    Response: The Agency has considered the commenter's suggestions and 
the rule addresses each substantive suggestion. As part of the lender 
approval process, the rule requires all lenders to maintain internal 
audit and management control systems to evaluate and monitor the 
overall quality of its loan origination and servicing activities (Sec.  
5001.9(a)(2)). This is also required in Sec.  5001.15(f). Lenders are 
also required to compile and maintain in their files a complete 
application for each guaranteed loan (Sec.  5001.15(e)). In addition, 
the rule requires each lender to originate loans in accordance with its 
loan origination policies and procedures, to follow the requirements of 
this part with regard to origination and servicing, and to service 
loans in accordance with its servicing policies and procedures. 
Further, the rule clearly states, in Sec.  5001.16(b), that lenders are 
required to conduct credit evaluations for all applications for 
guarantee. Lastly, the rule requires lenders to provide real property 
and chattel collateral appraisals conducted by an independent qualified 
appraiser. To the extent that additional guidance on these requirements 
is required, the Agency will provide such guidance in the handbook to 
the rule.
    Comment: One commenter suggested adding a new paragraph (j) on 
surety bonds, as follows: ``(j) Surety bonds. The lender must ensure 
that surety bonds will be provided by construction contractors if 
Agency grant funds are provided to the borrower prior to completion of 
construction.''
    Response: The Agency agrees with the commenter that the rule needs 
to address surety bonds. The Agency has revised the rule in two ways. 
First, in subpart A, the Agency has added a provision for surety bonds. 
Second, the Agency has added in subpart B a requirement for payment and 
performance bonds sufficient to mitigate Agency risk if the project is 
never completed for both the Business and Industry guaranteed loan 
program and the Rural Energy for America Program guaranteed loan 
program.
General (Sec.  5001.16(a))
    Numerous commenters (as detailed below) expressed varying degrees 
of concern over the proposed requirement that the lender meet the more 
stringent requirements of either its policies and procedures or those 
of the Agency. Many commenters stated that this requirement should be 
removed from the rule, with some commenters stating that the Agency 
needs to set its own reasonable standards. Because their concerns were 
addressed at both loan origination and loan servicing, all of these 
comments are addressed in this section. Though similar, comments are 
addressed by individual commenter.
    Comment: One commenter stated that the Agency's requirement to 
apply the lender's more restrictive portion of its credit policy and 
procedures to either credit evaluation or servicing rather than conform 
to the Agency's regulation is too restrictive and penalizes those 
lenders with more restrictive credit policies. The commenter further 
characterized this requirement as onerous and unjust, placing higher 
standards on some lenders and less on others, and punitive to lenders 
with more stringent credit guidelines, who would be held to higher 
standards than those of the Agency, while other lenders with prudent 
credit policies and procedures have lesser standards to meet.
    Two other commenters stated that, for both origination and 
servicing, they disagree with the ``whichever is more stringent'' 
requirement, in part, because it would have the lenders operating at 
different levels.
    Response: First, as noted in responses to other related comments, 
the Agency has revised the rule to allow exceptions to the ``whichever 
is more stringent'' requirement by adding the phrase ``unless otherwise 
approved by the Agency.'' This reduces the ``restrictiveness'' of this 
requirement as objected to by the commenter.
    Second, the Agency disagrees that lenders with more stringent 
standards are being placed in a ``punitive'' position compared to those 
lenders with less stringent standards. The rule does not change how 
lenders currently apply their criteria to projects and borrowers under 
their lending practices. What the rule is doing is allowing lenders to 
apply their own policies and procedures, the ones with which they are 
familiar, to loans being guaranteed under this program. For any lender, 
where the rule has a policy or procedure that is more stringent than a 
lender's corresponding policy or procedure, the lender must comply with 
the more stringent policy or procedure in the rule.
    Comment: One commenter stated that requiring lenders with stricter 
term limits and larger collateral discount requirements to use those 
criteria rather than the standard Agency criteria will lead to such 
lenders offering shorter loan terms, which will create the concept of 
balloon, puts, and calls currently not allowed under the current 
regulations. According to the commenter, this will lead to shorter loan 
terms with balloons, resulting in fewer project and small business 
qualification and participation under the Agency program, because 
lenders will be required to use shorter terms with balloons if their 
policies and procedures are stricter than the Agency's terms limits. 
The commenter then stated that this result is inconsistent with the 
intent of the current and proposed rules.
    Response: The Agency disagrees with the commenter because the rule 
requires loans subject to Agency guarantee to be fully amortized.
    Comment: One commenter noted that the ``whichever is more 
stringent'' requirement removes one of the incentives for using the 
program, as many lenders use the Business and Industry program as a 
credit enhancer. The commenter illustrated this by stating that 
lenders' internal policies may limit the term of the loan to less than 
is allowed by Business and Industry program regulations. According to 
the commenter, this does

[[Page 76744]]

not mean that the loans are more risky, but it allows payments to be 
spread out over a longer period providing the borrower with a smaller 
debt service requirement and a better opportunity for success.
    A second commenter similarly noted that making the bank's more 
restrictive credit policy take precedence over the Agency's defeats the 
purpose of the Business and Industry Guarantee Program in that the 
Business and Industry program should make credit available when a 
lender would not ordinarily make the loan.
    Response: The Agency agrees with the commenter that the situation 
posed would need to be considered. In response to this and other 
related comments, the Agency revised the rule to require that the 
lender comply with its own policies and procedures or those in the 
rule, whichever is more stringent, unless otherwise approved by the 
Agency. The addition of this ``unless otherwise approved by the 
Agency'' allows the Agency and the lender to work together to address 
such situations as posed by this commenter and to consider each loan 
application on a case-by-case basis. Any agreement reached between the 
Agency and the lender must be reflected in the Conditional Commitment.
    Comment: One commenter stated that the ``whichever is more 
stringent'' requirement is inappropriate and unwieldy. This commenter 
recommended that the Agency establish its standards and lenders should 
be able to present any project that meets the Agency's standards even 
though it may be outside the lender's normal credit criteria. The 
commenter stated that this is a valid reason for a lender to seek a 
government guarantee. To illustrate its concern, the commenter gave the 
following example: If a lender's standard criteria for a loan to a non-
profit group is 30% cash equity but they have a long-standing customer 
with significant assets, good debt service coverage, but only 23% cash 
equity, the lender may use a guarantee to mitigate the exception. The 
project still meets Agency standards, but could not be done as the 
language is currently written.
    The commenter also stated that this requirement should be 
eliminated because, in part, it eliminates the opportunity for lenders 
to use a guarantee to mitigate a policy exception.
    Response: The Agency agrees with the commenter that the proposed 
rule could have prohibited the lender from submitting an application 
for a loan guarantee and that this would not necessarily have been 
desirable. As noted in the response to the previous comment, the Agency 
has revised the rule to provide for ``unless otherwise approved by the 
Agency.'' The addition of this conditional phrase allows the Agency and 
lender to address such situations as posed by the commenter.
    Comment: One commenter stated that the ``whichever is more 
stringent'' requirement is redundant because where the lender has more 
stringent policies than the Agency's, the lender will have to follow 
those to get the loans through its own credit administration policies.
    Response: While this requirement might be considered redundant for 
those lenders that have policies and procedures more stringent than 
those contained in the rule, it is not redundant for those lenders that 
have policies and procedures less stringent than those contained in the 
rule.
    Comment: One commenter stated that if the Agency's rules are more 
stringent, it is up to the Agency personnel to ensure that the lender 
follows Agency rule. The commenter stated that they believe this does 
not have to be a written rule, it is obvious. Another commenter stated 
that this requirement should be eliminated because, in part, it 
unrealistically expects Agency staff to be able to verify that a 
project/borrower met all of the lender's criteria.
    Response: The Agency disagrees with the commenter's assertion that 
it is up to Agency personnel to ensure that a lender follows Agency 
rules. It is the lender's responsibility to know and follow the 
requirements in the rule. While the Agency may not have sufficient 
information to determine the lender's standards on a case-by-case 
basis, the Agency can still verify that the requirements are being met 
through other rule provisions for routine servicing and lender 
oversight.
    Comment: One commenter asked what would happen if the more 
stringent Agency's policies resulted in a default, and suggested that 
this requirement increases the potential for the Agency to micromanage 
the loan itself.
    Response: The Agency's standards establish minimum criteria for 
loans that the Agency is willing to guarantee. If the lender's 
standards are less stringent than these, then the Agency would not 
guarantee that loan. The Agency's standards do not cause the borrower 
to go into default.
    The Agency disagrees with the commenter's characterization that the 
rule increases the potential for the Agency to micromanage the loan 
itself. The entire rule is built around providing lenders with more 
independence in originating and servicing loans than under the current 
regulations for the programs included in this rule. In addition, the 
lender knows beforehand what policies and procedures will be required 
when the lender agrees to participate in this program.
    Comment: One commenter asserted that the proposed ``whichever is 
more stringent'' requirement could lead to a scenario where an Agency 
reviewer starts second-guessing lenders on what their in-house 
underwriting standards say.
    Response: The Agency disagrees with the commenter's assertion. 
While the Agency may not have sufficient information to determine the 
lender's standards on a case-by-case basis, the Agency can still verify 
that the requirements are being met through other rule provisions for 
routine servicing and lender oversight.
    Comment: One commenter stated that the ``whichever is more 
stringent'' requirement should be eliminated because, in part, by using 
this policy, the Agency is inviting more participation from lenders 
with the lowest credit standards as they will be able to find more 
rural businesses that meet their credit standards.
    Response: The fact that a lender has less stringent policies and 
procedures than another lender is, by itself, an insufficient reason 
not to allow the former to participate in this program. If the former 
lender's policies and procedures are determined by the Agency to be 
sufficient for participation, then the Agency believes such lenders 
should be allowed to participate. Therefore, the Agency has not 
eliminated this requirement as requested by the commenter.
    Comment: Two commenters stated that, for both origination and 
servicing, they disagree with the ``whichever is more stringent'' 
requirement, in part, because it would interfere with the authority of 
the lender's regulators. These commenters recommended keeping the 
current regulation.
    Response: The rule sets up a relationship between the lender and 
the Agency in guaranteeing loans for programs included in this rule. 
The relationship between the lender and its regulator is outside the 
purview of this rule.
    Comment: Two commenters stated that, with regard to servicing, if 
the ``whichever is more stringent'' requirement is adopted, it would 
cause confusion and generate many legal suits and would not be 
acceptable to lenders. These commenters recommended keeping the current 
regulation.

[[Page 76745]]

    Response: The Agency does not believe that this requirement would 
create the ``confusion'' claimed by the commenter. Each lender would be 
responsible for complying with its own policies and procedures or those 
in the rule, and would not be responsible for or concerned with the 
policies and procedures of other lenders. Thus, the Agency does not 
agree that there would be confusion for what an individual lender is 
required to do to comply with this rule.
    In addition, the rule allows the Agency and the lender to reach 
agreement under the ``unless otherwise approved by the Agency'' 
provision, which the Agency believes resolves most, if not all, of a 
lender's concern with this requirement.
    Comment: One commenter stated that, in reading the requirement that 
the lender must comply with whichever is more stringent, they 
interpreted the requirement to say that, if the lender would not 
approve a deal at 80% loan-to-value conventionally, then it could not 
use the USDA program to add value to the property and relax its credit 
policy.
    Response: The Agency has revised the rule to require the lender to 
comply with whichever is more stringent, unless otherwise approved by 
the Agency. The proposed rule did not contain the ``unless otherwise 
approved by the Agency'' clause. Thus, the rule would allow the Agency 
and the lender to reach agreement on how to handle the situation posed 
by the commenter and such agreements would be reflected in the 
Conditional Commitment.
    Comment: One commenter had questions regarding Sec.  5001.16(a)(1) 
in which the Agency may require an independent credit risk analysis on 
the loan. The commenter questioned what this analysis is, who would do 
it, who would pay for it, and what it is for.
    Response: On a case-by-case basis, the Agency may require the 
lender to provide a rating or opinion of the underlying credit by an 
independent credit rating organization at other than Agency expense.
Credit Evaluation (Sec.  5001.16(b))
    Comment: One commenter stated that the lender should be required to 
compare the financial projections to the industry averages for 
reasonableness.
    Response: The Agency agrees that this can be a reasonable 
comparison as part of credit evaluation. Such a comparison, though, 
would be applicable to Business and Industry and the Rural Energy for 
America programs and would not be applicable to the Community 
Facilities and Water and Waste Disposal programs. The rule (Sec.  
5001.16(b)(2)(v)), Conditions) provides the Agency with the ability to 
require this when it is appropriate or is needed to address 
reasonableness. Therefore, the Agency has not revised the rule in 
response to this comment.
    Comment: Two commenters noted that although the proposed rule 
requires the lender to prepare a credit evaluation that is consistent 
with Agency standards ``found in this part,'' there are no standards 
found in this part, only a general description of the 5 C's of credit. 
They also noted that the proper standards to use are detailed in RD AN 
No. 4308 (4279-B, 4280-B, and 4287-B), and suggested using the 
Administrative Notice's definition in the Federal Register (rather than 
in the Administrative Notice).
    A third commenter noted that the Agency has issued a variety of 
Administrative Notices and Unnumbered Letters relating to, but not 
limited to: credit due diligence, lender credit due diligence, project 
risk, and collateral evaluation and appraisal requirements, as 
guidelines for State Offices. We find that those standards are missing 
from the proposed rule. The commenter encouraged the Agency to 
incorporate its administrative notices, including but not limited to, 
RD AN No. 4280 and RD AN No. 4308, in this section in order to 
establish published regulations for credit evaluations.
    Response: The standards being referred to by the commenters are the 
``5 C's of credit'' (Sec.  5001.16(b)(2)(i) through (v)) as well as the 
eligibility standards set forth in Sec.  5001.6(b). With regard to the 
Administrative Notices referred to by the commenters, the Agency will 
incorporate the appropriate notices in the handbook for the rule.
    Comment: One commenter stated that the correct 5 Cs of credit are 
character, capacity, capital, collateral, and conditions, not credit 
worthiness, cash flow, capital, collateral, and conditions.
    Response: For the purposes of this rule, the Agency is 
characterizing the 5 C's of credit as proposed and has not modified the 
rule as suggested by the commenter.
    Comment: One commenter suggested that the following be incorporated 
in Sec.  5001.16(b)(2)(i): ``Credit history should indicate no 
derogatory past or present credit or payment performance, no 
bankruptcy, foreclosures, judgments, collections, no Federal, State, 
Municipal, County unpaid tax liens, no fraud or felonies individually, 
corporately or of any related concerns, affiliates, subsidiaries.'' If 
so, explain.
    Response: ``Credit history'' is a well understood industry term 
that contains the elements identified by the commenter. Therefore, the 
Agency does not believe it necessary to spell out to this level of 
detail in the regulation and no changes to the rule have been made in 
response to this comment.
    Comment: One commenter suggested the following for Sec.  
5001.16(b)(2)(ii): Including, but not limited to, cash flow available 
to service the proposed and historical debt with a service requirement 
of 1.0 to 1 as defined in the proposed regulation.
    Response: ``Cash flow'' is a well understood industry term that 
contains the elements identified by the commenter. Therefore, the 
Agency does not believe it necessary to spell out to this level of 
detail in the regulation and no changes to the rule have been made in 
response to this comment.
    Comment: One commenter suggested the following for Sec.  
5001.16(b)(2)(iii): Capital, including, but not limited to, for 
existing businesses, 10% tangible balance sheet equity, new company 20% 
tangible balance sheet equity.
    Response: The Agency does not intend this part of the rule to spell 
out specific metrics that each project must meet when a lender conducts 
its credit evaluation (other than as specified in Sec.  5001.6(b) as 
minimum threshold levels). Rather, the Agency is relying on the lender 
to perform its credit evaluation in accordance with its policies and 
procedures and the Agency will review such evaluations when determining 
whether or not to issue the Loan Note Guarantee.
    Comment: Two commenters stated that there is no discussion on the 
proper discounting of collateral for Business and Industry guarantees. 
The commenters added that Sec.  5001.16(b)(2)(iv) is adequate for 
lending to nonprofit entities and public bodies, but is inadequate for 
lending to for-profit businesses. The commenters recommended using the 
language found in RD AN No. 4279 (4279-B).
    A third commenter offered suggested discount loan to value ratios 
as follows:
    Land: 40% (low), 80% (high)
    Improved Commercial Property: 50% (low), 85% (high)
    Chattels: 50% (low), 65% (high)
    Inventory: 25% (low), 60% (high)
    Accounts Receivable (Less than 90 days): 50% (low), 85% (high)
    Response: As noted in responses to previous comments, the Agency 
has revised the rule for the Business and Industry and the Rural Energy 
for America programs by adding specific discounted values in subpart B 
for the two programs. For other types of collateral in these two 
programs and for the other programs, the Agency will

[[Page 76746]]

identify appropriate discounted values in the Conditional Commitment. 
The lender is required to use either the discounted values in the rule 
or in its own policies and procedures, whichever is more stringent, 
unless otherwise approved by the Agency.
Appraisals (Sec.  5001.16(c))
    Comment: One commenter recommended that appraisal requirements 
should follow 7 CFR part 3575, subpart A in that appraisals may be 
required by the lender or the Agency. According to the commenter, 
community facility projects are typically specialized facilities and 
may very well not appraise for the cost to actually construct them. The 
security package generally relies on revenues and community support of 
the facility to pay the debt. This is the primary reason a lender will 
need the guarantee, because there is not enough hard security to secure 
the loan without the guarantee.
    Another commenter requested the removal of the appraisal 
requirement and fair market evaluation for real estate collateral taken 
as security for Community Facilities. The commenter noted that 
currently more than 50% of Guaranteed Community Facilities are made for 
benefit of healthcare. The commenter stated that the focus for the next 
several years will be on Critical Access Hospitals, which are aged and 
in critically in need of replacement and that for healthcare facilities 
a fair market valuation is difficult to obtain and comparables within 
proximity are likely impossible.
    Response: As noted in a response to a previous comment on 
appraisals under Sec.  5001.12, Applications, the Agency is requiring 
that appraisals acceptable to the Agency be submitted with the 
application, if they are available. If they are not available at the 
time the application is submitted, complete appraisals must be 
submitted to the Agency before loan closing.
    With regard to appraisals and community facilities, the Agency 
agrees with the commenter that issues may arise when obtaining 
appraisals for community facility projects because such projects may 
not appraise for the full value of the guarantee. However, the Agency 
believes that, in those instances where this may occur, the project can 
still be considered for a loan guarantee without compromising risk 
mitigation if there is sufficient demonstration of community support. 
Therefore, the Agency has added a provision to subpart B for community 
facilities (see Sec.  5001.101(e)) that specifically allows the Agency 
to consider community support in evaluating the application for 
guarantee when a loan's collateral appraises at a level less than 100% 
of the loan amount.
    Comment: One commenter recommended adding the following language: 
``Chattel property will be evaluated in accordance with normal banking 
practices and generally accepted methods of determining value.''
    Response: The Agency agrees that the rule needs to address chattel 
property as suggested by the commenter. The Uniform Standards of 
Professional Appraisal Practices (USPAP) contains standards that cover 
chattel property. The rule requires that such appraisals be completed 
in accordance with USPAP standards.
    Comment: Two commenters commented on who would conduct the 
appraisals. One commenter noted that Certified General Appraisals 
perform appraisals, not lenders. This comment recommended that the 
requirement should read that the lenders will obtain a real property 
appraisal in accordance with USPAP Standards 1 and 2. The other 
commenter noted that collateral will be appraised by the lender in 
accordance with the appropriate guidelines contained in the current 
USPAP Standards 1 and 2 or successor standards. This commenter stated 
that it is generally not appropriate for the lender to conduct real 
estate appraisals, and wondered if the Financial Institutions Reform, 
Recovery and Enforcement Act standards were intentionally left out and 
suggested adding the following language, so as to put the 
responsibility on the lender: ``Lenders will be responsible for 
ensuring that appraisal values adequately reflect the actual value of 
the collateral.''
    Response: The Agency agrees with the commenters that appraisals 
should be conducted by an independent qualified appraiser, not by a 
lender. Therefore, the Agency has modified the rule text to state, in 
part, that ``lenders are required to provide real property and chattel 
collateral appraisals conducted by an independent qualified 
appraiser.''
    Comment: One commenter stated that appraisals should not be 
required prior to approval, because borrowers would have to pay cash 
for the appraisal with no assurance that financing would follow. The 
commenter recommended requiring the appraisal after the guarantee is 
approved, but before its issuance.
    Response: The Agency understands the concern expressed by the 
commenter. In the rule, appraisals acceptable to the Agency are to be 
submitted with the application if they are available. If they are not 
available at the time the application is submitted, complete appraisals 
must be submitted to the Agency before loan closing.
    Comment: Several commenters raised concerns over environmental 
hazards and appraisals.
    One commenter requested that the requirement that appraisals 
include consideration of the potential effects from a release of 
hazardous substances or petroleum products or other environmental 
hazards on the market value of the property be removed. The commenter 
noted that an environmental assessment is already performed by USDA on 
the property and that for certain types of facilities local, state, and 
federal regulations provide for certain criteria in the handling of 
hazardous substances and the facilities must be built to those 
specifications. Another commenter stated that, because environmental 
assessment reports are already required, the process of identifying 
possible contaminants is already being performed and any potential 
threat would already be identified.
    One commenter recommended that because appraisers are not usually 
experts on the scientific aspects of contamination, experts from other 
fields, such as appropriate regulatory authorities, be consulted to 
confirm the presence or absence of any contamination or potential 
release. Another commenter stated that this requirement is not going to 
be effective because appraisers are not qualified to test for or detect 
environmental hazards and the appraised value is based on the 
assumption that no environmental contaminants exist on the subject 
property. This commenter also noted that unless there is a quantifiable 
clean up cost, the appraiser cannot be expected to forecast that effect 
on the future market value.
    One commenter stated, in general, that the present process of the 
lender obtaining an environmental assessment report for the proposed 
site and including a review of adjacent properties coupled by the NEPA 
review by USDA personnel would seem to be extraordinary processing. For 
new construction, the borrower must obtain permits from local 
authorities that would already include this type of review process.
    Response: The first commenter is assuming that, under NEPA, the 
Agency will always conduct an environmental assessment. However, in 
accordance with the applicable regulation, environmental assessments 
are not always required especially if a project qualifies for a 
categorical exception. In

[[Page 76747]]

addition, NEPA is a Federal requirement that the Agency cannot waive. 
For these reasons, the Agency believes it would be inappropriate to 
remove this requirement from the regulation and rejects this request.
    With regard to the concern expressed about the qualifications of 
the appraiser with regard to environmental hazards, the Agency agrees 
with the commenters that appraisers may lack the requisite expertise to 
assess environmental hazards adequately. In such instances, the Agency 
would expect an appraiser to seek qualified assistance or to note in 
the report his/her opinion on environmental hazards. However, the 
Agency does not believe it is necessary to address this concern in the 
rule.
Personal, Partnership, and Corporate Guarantees (Sec.  5001.16(d))
    The Agency notes that provisions in the rule now include reference 
to partnership guarantees, although this term is not used in the 
following comments and responses to those comments.
    Comment: One commenter suggested adding the following language to 
the end of the paragraph as follows: ``Personal and corporate 
guarantees. Unconditional personal and corporate guarantees are part of 
the collateral for the loan, but should not be considered when 
calculating the loan-to-value ratio.''
    Response: The Agency agrees, in part, with the commenter's 
suggestion in that unconditional personal and corporate guarantees 
should not be considered when calculating the loan-to-value ratio if 
these unconditional guarantees are unsecured. The Agency believes that 
unconditional personal and corporate guarantees that are secured can be 
used to determine security of the loan. Secured, unconditional 
guarantees can be used in calculating the loan-to-value ratio because 
they are part of the security. Because unsecured, unconditional 
guarantees are not part of the security of the loan, they, by 
definition, cannot be used in calculating the loan-to-value ratio.
    Comment: One commenter suggested that the unconditional guarantee 
form for personal guarantees be modified to allow for some negotiation, 
for example, pro-rata guarantees based on one's percentage of 
ownership.
    Response: The Agency agrees with the commenter that the proposed 
rule was unclear on whether the unconditional guarantee is secured or 
not. The commenter appears to believe that such guarantees must be 
secured and, therefore, should be adjusted on a pro-rata basis. In the 
rule, the Agency has clarified the difference between secured and 
unsecured guarantees and believes that this clarification addresses the 
commenter's concern.
Design Requirements (Sec.  5001.16(e))
    Comment: One commenter recommended deleting the entire design 
requirement because lenders do not have the expertise to certify that 
design requirements meet accepted practices or that the design and 
construction of the project conform to applicable federal, state, and 
local codes and requirements. The commenter also stated that by virtue 
of the borrower obtaining a building permit, a qualified person and/or 
agency has already made those determinations of qualifications.
    This commenter also expressed concern with the requirement for the 
lender to ensure that the project is constructed within the original 
budget. According to the commenter, there are many times when a 
contractor ``comes across'' an unknown (e.g., abandoned leach line not 
previously identified, a finding of Native American artifacts on the 
site, etc.) that would necessitate a change in the overall construction 
budget that was beyond the control of the borrower, contractor, or the 
lender. All of these are examples that would necessitate a change in 
the overall construction budget that were beyond the control of the 
borrower, the contractor of the lender.
    Response: The Agency disagrees with the recommendation to delete 
this requirement. Building permits may not reflect all Federal 
requirements (e.g., Americans with Disabilities Act). In addition, the 
Agency believes that lenders either have or can procure the appropriate 
expertise to address these requirements. Therefore, the Agency has not 
revised this requirement in response to this comment.
    With regard to the comment concerning ensuring that the project is 
constructed within the original budget, the Agency agrees with the 
concerns expressed by the commenter. The Agency has revised the rule to 
state that the project will be fully constructed with the ``approved'' 
budget, rather than the ``original'' budget as was proposed.
    Comment: One commenter suggested that a section should be added to 
require that the design consultant or an independent qualified 
inspector certify that the project was built in accordance with the 
plans and specifications as well as all applicable building codes.
    This commenter suggested adding the following sentence: ``Lenders 
must also ensure that all projects are designed using Agency 
recommended environmental mitigation measures.''
    Response: The certification that the project was built in 
accordance with the plans and specifications and all applicable 
building codes will be provided in the loan documentation. The Agency 
does not believe it is necessary to state such in the rule.
    With regard to the suggestion to add language ensuring that all 
projects are designed using Agency recommended environmental mitigation 
measures, this is provided for in Sec.  5001.16(h)(2) and the Agency 
does not believe any changes are required in this regard.
    Comment: One commenter noted that in some rural areas, no 
commercial building code has been adopted by the state or local 
jurisdiction. The commenter stated that in the Agency's direct 
programs, the Agency adopts a minimum model building code standard for 
those areas to meet, and questioned how this issue will be addressed 
under a guaranteed program with lender involvement. The commenter 
suggested that it might be simplest to have the lender/borrower/project 
architect use the commercial building code adopted by the Agency rather 
than pick another model building code. The commenter noted that in 
jurisdictions where there is no officially adopted commercial building 
code, there would be considerable risk involved in development unless 
some generally recognized commercial building code is followed.
    Response: The Agency agrees that the situation identified by the 
commenter needs to be addressed. The Agency has modified the rule to 
``or other Agency-approved code.'' This will allow the Agency to 
address specific situations on a program-by-program basis. In addition, 
the Agency will provide additional guidance in the handbook to the 
rule.
Monitoring Requirements (Sec.  5001.16(f))
    Comment: One commenter questioned how the Agency will monitor that 
the lender actually monitored construction and processed funds, 
ensuring that the funds are used only for eligible project costs. The 
commenter suggested that attendance at a final inspection could provide 
verification that work was adequately performed and that there is a 
product for the funds expended.
    Response: The rule requires the lender to commit to monitoring 
construction in accordance with approved plans and specifications and 
to ensure that project funds are used only for Agency-approved project 
costs by certifying to such in the Conditional Commitment. While the 
Agency's general policy is not to monitor construction, either during 
or at a final

[[Page 76748]]

inspection, the Agency reserves the right to take any monitoring action 
for its own purposes.
Compliance With Other Federal Laws (Sec.  5001.16(g))
    Comment: One commenter suggested providing a more comprehensive 
list that would include all the Federal laws that would apply for a 
loan guarantee, and suggested that the Office of General Counsel should 
be consulted. The commenter provided several additional laws that would 
also apply:

--Copeland Anti-Kickback Act (18 U.S.C. 874)
--Restrictions on Lobbying (Pub. L. 101-121, section 319)
--Suspension/Debarment requirements (7 CFR part 3017)
--Residential Lead-Based Paint Hazard Reduction Act of 1992 (24 CFR 
part 35)

    Response: The Agency disagrees with the commenter that additional 
laws should be added to this list provided in this paragraph. An 
accounting of all applicable Federal laws is better addressed outside 
of the regulation. The Agency will consider identifying additional 
applicable Federal regulations in the handbook to the rule. The Agency 
has not revised this paragraph in response to this comment.
    Comment: One commenter recommended verifying with the Civil Rights 
Staff the language about compliance reviews as being required every 
three years and that they end three years after the date of loan 
closing is correct. The commenter suggests that the correct language is 
more likely three years after loan payoff, because loan closing 
typically occurs at the end of construction and compliance reviews 
would end with the first review after completion of building 
construction.
    Response: The Agency consulted with their Civil Rights staff in 
considering this comment. The last sentence of the proposed paragraph, 
which is what is being commented on, applies to grants and direct loans 
and not to guaranteed loans. However, if a guaranteed loan is combined 
with a direct loan or a grant, then this provision needs to be taken 
into account. Such situations will be identified in the handbook to the 
rule. Because it is not needed, the Agency has removed this sentence 
from the rule and further response to this comment is unnecessary.
Environmental Responsibilities (Sec.  5001.16(h))
    Comment: One commenter questioned how the Agency will take 
responsibility for ensuring that the lender has made certain that the 
borrower has provided the necessary environmental information (e.g., 
permits), has adopted and implemented required mitigation measures, and 
is not taking any actions that may limit the range of alternatives 
(e.g., anticipatory demolition).
    This commenter also suggested that the Agency take responsibility 
for ensuring the lender has made certain that the borrower has complied 
and then asked: ``How will the Agency monitor such assurances?''
    Response: The information provided by the lender in Sec.  
5001.16(h)(1) provides the Agency with the information necessary to 
evaluate compliance with the requirements specified in Sec.  
5001.16(h)(2) and (h)(3). Furthermore, as proposed, the rule reflects 
the current practices and operation employed by the Agency and has 
proven adequate to protect the interests of the government.
    With regard to the comment concerning the monitoring of lender's 
assurances that the borrower has complied, if the Agency discovers that 
the lender's certifications are false, the Agency may pursue debarment.
Conflicts of Interest (Sec.  5001.16(i))
    Comment: One commenter questioned how a lender would identify a 
conflict of interest and how the Agency would monitor this lender 
activity.
    Response: Lenders would identify what the Agency considers to be 
conflicts of interest or appearance of conflicts of interest through 
guidance in a handbook to the rule. With regard to monitoring the 
lender's identification of conflicts of interest, the lender is 
required to submit a written summary of its origination policies and 
procedures, which would describe the process to be used to identify 
such conflicts. The Agency would then depend on the lender to notify 
the Agency of conflicts. Finally, through its monitoring of the lender, 
including during lender visits, the Agency may discover conflicts.
Lender Responsibilities--Servicing (Sec.  5001.17)
    Comment: One commenter recommended that the Agency incorporate into 
the rule the requirement that a lender obtain financial statements from 
the borrower and submit them to the Agency within 120 days (or 
preferable 150 days) with their written analysis and comments, as found 
in the existing 7 CFR 3575.69(b).
    Two commenters noted that there appears to be no requirements for 
the borrower to provide annual financial statements to the lender. One 
of these commenters suggested developing a section that requires annual 
financial statements from the borrower prepared by a certified public 
accountant in accordance with GAAP.
    The other commenter suggested adding the following paragraph: ``(c) 
Borrower financial statements. The lender must obtain and forward to 
the Agency the financial statements required by the Conditional 
Commitment and Loan Agreement. The lender must submit annual financial 
statements to the Agency within 120 days of the end of the borrower's 
fiscal year. The lender must analyze the financial statements and 
provide the Agency with a written summary of the lender's analysis and 
conclusions, including trends, strengths, weaknesses, extraordinary 
transactions, other indications of the financial condition of the 
borrower, and the borrower's current loan classification.''
    Response: The Agency agrees with the commenters that the proposed 
rule did not adequately address requirements for financial statements 
once the guaranteed loan is in place and that such a requirement needs 
to be provided for in the servicing section of the rule. The Agency has 
determined that the requirement for financial information on borrowers 
can be handled in a similar fashion for all of the programs included in 
this final rule. Specifically, the rule contains a provision for the 
submittal of financial reports once the loan is in place (see Sec.  
5001.17(d), Financial reports). This provision requires regulated or 
supervised lenders to submit the information that would be contained in 
financial reports required by the lender's appropriate regulatory 
institution. This information would be submitted to the Agency at the 
same time it should be made available to the appropriate regulatory 
institution, unless otherwise provided in the Conditional Commitment. 
For other lenders, the rule requires financial reports as specified in 
the Conditional Commitment.
Collateral (Sec.  5001.17(e) (Proposed Sec.  5001.17(c))
    Comment: Five commenters provided comments on the requirement to 
obtain prior approval from the Agency. Two of the commenters stated 
that the requirement is ``pretty loose'' because the Agency is 
guaranteeing the lender against loss on 60 to 90% of the loan, and 
recommended that prior Agency approval be required on all releases of 
collateral.
    Another commenter stated that this requirement is ``overreaching'' 
Agency needs and should be further defined and limited. According to 
the commenter,

[[Page 76749]]

lenders and borrowers need to have clear understanding of their rights 
and responsibilities and must be free to run their business, service 
their loans, and conduct normal business transactions without Agency 
review. Above a point certain, defined early in the processing, sure, 
the lender should approach the Agency. But this section needs to 
identify what that demarcation line is, not leave it completely open-
ended and unilateral.
    One commenter stated that it is not clear how the lender is to know 
when prior Agency approval is required. Another commenter recommended a 
dollar threshold of $20,000 for when the Agency may require Agency 
approval prior to releasing collateral, and that any release for more 
that that would require prior Agency approval.
    Response: In considering these comments, the Agency has rewritten 
parts of this paragraph to clearly identify those situations in which 
the Agency will not require prior approval. Those instances are where 
the proceeds are used to pay down debt in order of lien priority, or to 
acquire replacement equipment, or where the release of collateral is 
made under the abundance of collateral provision of the security 
agreement. In all other instances, the Agency will require written 
approval.
    Comment: Two commenters stated that there are instances where a 
lender will take a lien on collateral as ``additional security'' to be 
released later without monetary consideration under certain specified 
conditions. Therefore, the commenters recommended that the rule allow a 
lender such flexibility subject to USDA's prior written concurrence. A 
third commenter stated that the proposed regulation on the release of 
collateral is too restrictive on the lender. This commenter suggested 
that maximum flexibility should be allowed for application of sale 
proceeds, as long as the lender and USDA can agree.
    Response: In order to manage the risk inherent in the Agency's 
portfolio of guaranteed loans, the Agency has provided significant 
flexibility in certain instances as identified in the rule (Sec.  
5001.17(e)) and will consider all other releases on a case-by-case 
basis and provide written approval as appropriate.
Transfers and Assumptions (Sec.  5001.17(f)) (Proposed Sec.  
5001.17(d))
    Comment: One commenter recommended adding the following language to 
proposed Sec.  5001.17(d)(2)(i): ``While a transfer and assumption is a 
loan servicing action, it is subject to an Agency review of its credit 
quality, and must be in compliance with published eligibility 
requirements set forth in this subpart. This would normally require 
submitting a new application; business plans with pro forma balance 
sheets, 2 years projected balance sheets and income statement, in 
addition to the lender's financial analysis of the new business and 
current guarantor financial statements.'' The commenter noted that, if 
this is not published, how will lenders know to submit this information 
when processing a transfer and assumption.
    Response: As proposed and as retained in the rule, any time a 
third-party assumes a loan guarantee under this part, the loan 
guarantee will be processed and approved by the Agency as if it were a 
new loan guarantee application. This means that the assumption will be 
subject to a review of the credit quality and compliance with the 
eligibility requirements of the rule, just as would a new loan 
guarantee application. Therefore, there is no need to revise the rule 
as suggested by the commenter. The Agency will provide additional 
guidance on this point in the handbook to the rule.
    Comment: One commenter recommended deleting the transfer and 
assumption fees because the loan guarantee program already obtains an 
annual renewal fee from each lender and an additional fee would be an 
undue burden on the lender.
    Response: The Agency has not adopted the suggestion made by the 
commenter to delete the provision for transfer and assumption fees. The 
Agency notes that the rule does not require the Agency to charge such 
fees, but that they are optional. If, in the future, the Agency 
determines that such fees adversely affect the programs, the Agency 
will either stop charging such fees or make an adjustment to them.
Mergers (Sec.  5001.17(g)) (Proposed Sec.  5001.17(e))
    Comment: Ten commenters requested that the Agency not be allowed to 
withdraw the guarantee when a borrower participates in a merger.
    Several commenters pointed out that current Business and Industry 
regulations establish that a borrower cannot participate in a merger 
without prior approval of the lender and USDA. One commenter stated 
that, under the existing regulation, lender documents contain language 
that the borrower cannot participate in a merger without prior approval 
by the Bank and USDA.
    One commenter noted that it is possible for borrowers to 
participate in mergers without lender knowledge and suggested that a 
more reasonable and equitable solution would be to require prior Agency 
approval for mergers or the Agency would have a case for negligent 
servicing. The commenter also wondered why this action is being singled 
out.
    One commenter stated that the merger of a company should not be 
grounds for the guarantee being withdrawn, and recommended that the 
current regulations requiring the lender to obtain approval from the 
Agency for a merger remain.
    One commenter stated that if the Agency can withdraw the guarantee 
for something as simple as a borrower merger, the lender will fear the 
Agency can withdraw the guarantee at every chance it gets. The 
commenter pointed out that a borrower merger is out of the control of 
the lender and the lender cannot and should not be penalized if the 
borrower decides to merge with another company and not seek permission 
from the lender and USDA prior to the merger. According to the 
commenter, one withdrawal would ruin the reputation of the program and 
then asked ``What would become of the innocent holders in this 
scenario?''
    Three commenters stated that this will be detrimental to the 
borrower, the lender, and the secondary market, is not borrower, 
lender, or secondary market friendly, and would reduce the number of 
borrowers, lenders, and investors interested in the programs.
    Another commenter said that this is unduly harsh. According to the 
commenter, a borrower could merge without the permission or knowledge 
of the lender, notwithstanding contract requirements prohibiting such 
an act. The commenter stated that the risk that such an event could 
occur is one which is shared by both the lender and the guaranteeing 
agency and that the partnership between our bank and various agencies 
offering federal guarantees has always been one of partnership, with 
each of us assuming our share of the risks associated with lending. 
This provision represents a significant preference in favor of the 
guaranteeing agency, a circumstance which is a major departure from our 
historical sharing of risks and responsibilities.
    One commenter stated that this provision would cause major problems 
with the lending and secondary market. The commenter noted that the 
guarantee is supposed to be a full faith in credit guarantee from the 
Agency to the secondary market note holder. According to the commenter, 
this proposed paragraph should be eliminated because no mergers can 
occur without the prior written consent

[[Page 76750]]

of the Agency or Lender and it places a great burden on lenders and 
secondary note holders.
    Response: In considering the comments submitted, the Agency has 
revised the provision that would have allowed the Agency to withdraw a 
guarantee in situations where a borrower participates in a merger. This 
provision was intended to help ensure that the merger did not result in 
a less desirable borrower (i.e., one who might not be able to repay the 
loan). The Agency agrees that withdrawal of the guarantee is not the 
best way to help avoid this outcome. Instead, the Agency is requiring 
that both Agency and lender approval is required prior to a borrower 
participating in a merger. In this fashion, both the Agency and the 
lender will discuss the proposed merger and evaluate the quality of the 
new borrower.
    In addition, the Agency recognizes that a borrower may participate 
in a merger without notifying its lender or the Agency. To help address 
this situation, the Agency has added a provision to the rule that 
requires the lender to accelerate the loan if a borrower merges without 
prior Agency approval, unless subsequently agreed to by the Agency in 
writing.
Subordination (Sec.  5001.17(h)) (Proposed Sec.  5001.17(f))
    Comment: Seven commenters expressed concern over the one-year time 
frame.
    One commenter noted that most banks are now trying to set up 
operating lines of credit for two to three years, and to have to go 
back to the USDA every year would be counterproductive and inefficient. 
Another commenter stated that to have to approve subordinations every 
year for lines of credit is burdensome and that consideration should be 
given to extending this for a longer period.
    One commenter pointed out that lines of credit are often extended 
for periods of three to five years and suggested that the rule allow 
for subordination on working assets (A/R and inventory) for more than 
up to at least three years. Another commenter recommended that the rule 
allow subordination on working assets for more than one year, noting 
that flexibility to approve multi-year subordinations is appropriate 
and beneficial to the borrower. Two commenters suggested that this 
provision should allow three to five years, with one commenter stating 
that the one-year limit may not allow the company to operate past the 
one-year time frame.
    One commenter stated that limiting subordination of term debt to 
one year for a revolving line of credit has never been a good or 
workable policy. This commenter questioned if the lender can trust USDA 
to be reasonable with this, and if the subordination is not continued, 
what happens to the line of credit's lien position and what does this 
do to the borrower's ability to operate the business. The commenter 
stated that the subordination should be automatic if the line is 
renewed at the same level from year to year.
    Response: After considering the reasons cited by the commenters, 
the Agency agrees that one year is too short a time frame. The Agency 
has replaced the one-year time frame in the rule such that the 
subordination of line of credit cannot extend the term of the line of 
credit and cannot be more than three years under any circumstances.
    Comment: One commenter stated that it is reasonable for the 
Agency's financial interests to be maintained, but that it is not 
reasonable to require the Agency's financial interests to be enhanced 
by subordination. The commenter also stated that it is not reasonable 
to require the loan to remain adequately secured if it was not 
adequately secured before the subordination. According to this 
commenter, the Agency should not be in a worse position as a result of 
subordination.
    A second commenter urged the Agency to incorporate the current 
regulation, which states that the subordination must enhance the 
borrower's business and the Agency, into the proposed rule.
    Response: The Agency considered the two commenter's comments on the 
relationship of the subordination to the Agency's interest, including 
the provisions in the current regulation. The Agency agrees that the 
proposed provision that the Agency's financial interest be enhanced was 
not reasonable, but that the Agency should not be in a worse position 
as a result of subordination. The Agency has revised the rule to 
require that the subordination ``be in the best financial interest of 
the Agency.''
    With regard to the comment concerning the proposed requirement that 
the loan ``remains adequately secured,'' the Agency has determined that 
this requirement does not need to be spelled out in the rule, because 
the relationship of collateral to the loan is inherent in the 
requirement that the subordination be in the best financial interest of 
the Agency. Thus, the Agency has removed this provision from the rule.
Repurchases From Holders (Sec.  5001.17(i)) (Proposed Sec.  5001.17(g))
    Comment: One commenter suggested adding language requiring Agency 
concurrence when a holder objects to selling its interest in a loan to 
the lender. The commenter noted that, in some cases, the holder is not 
asked if they would concur in the servicing action and that they have 
handled calls from holders that object to selling their interest so the 
lender can complete simple servicing actions that the holder would not 
oppose. The commenter stated that this becomes increasingly 
objectionable when the notes are repeatedly sold by the lender at a 
premium and repurchased at par.
    Response: The Agency agrees with the concern expressed by the 
commenter about a holder who objects to selling its interest in a loan 
to the lender. The Agency has revised this provision to require that 
both the lender and the Agency (rather than either the lender or the 
Agency as was proposed) must determine that the repurchase is necessary 
to protect the loan. This change prevents a lender from making the sole 
determination of when to effect a repurchase and should adequately 
address the commenter's concern.
    Comment: One commenter stated that provisions should be expressly 
added to the requirements for repurchases from holders that when a 
borrower cures the default and the loan returns to performing status, 
the Agency is allowed to resell the guaranteed portion back to the 
lender at par value, whereupon the guaranteed portion could be further 
sold by the lender back into the secondary market. The commenter 
believed that this would result in considerable administrative savings 
to the Agency.
    Response: In considering this comment, the Agency discussed with 
the Treasury Department what, if any, constraints there are associated 
with the Agency reselling a repurchased loan. Based on this discussion, 
the Agency has found that it is prohibited from reselling any 
repurchased loan except under the Business and Industry guaranteed loan 
program. Therefore, the Agency has accepted the comment as it applies 
to the Business and Industry program, but cannot accept it for the 
other programs. The Agency has added a provision to subpart B of the 
rule (Sec.  5001.103(i)) to provide for the reselling of repurchased 
Business and Industry guaranteed loans, without recourse to third-party 
private investors. In making this provision, the Agency notes that its 
exposure is not increased because the Agency will pay to the

[[Page 76751]]

lender under the guarantee no more than the guaranteed principal and 
the guaranteed interest regardless of any advances made.
Additional Expenditures and Loans (Sec.  5001.17(j)) (Proposed Sec.  
5001.17(h))
    Comment: Five commenters suggested dropping the requirement for 
Agency concurrence. Two of the commenters stated that the requirement 
for Agency approval on all additional expenditures is not needed unless 
the expenditure or loan will violate one or more of the loan covenants 
of the borrower's loan agreement.
    Two other commenters stated that lenders should be allowed to 
extend unguaranteed loans without USDA concurrence, provided any USDA 
guarantee loan's collateral position is not altered and the borrower is 
current and performing as agreed. One of these two commenters added 
that the proposed requirement may limit the future growth and needs of 
the borrower, and the other commenter added that the requirement is 
cumbersome and intrusive.
    Finally, the fifth commenter suggested that the Agency not be 
involved in a lender's decision to make additional loans to the 
borrower outside the guarantee by revising the rule by being silent on 
this issue. According to the commenter, a lender follows its own 
internal guidelines and prudent lending practices, and if the lender 
violates its own policies and procedures, the Agency would have a case 
of negligent servicing. In addition, the commenter believed that it 
would be difficult to support a decision to prohibit a lender from 
extending additional credit.
    Response: The Agency agrees that Agency approval for all additional 
expenditures and loans is not required, but need only be required when 
such expenditures or loans would violate the borrower's loan agreement. 
Therefore, the Agency has revised the provisions to indicate that the 
lender may make additional expenditures without Agency approval unless 
the expenditure or loan will violate one or more of the loan covenants 
of the borrower's loan agreement. While the Agency agrees that making 
additional loans to the borrower outside the guarantee could serve as a 
basis for negligent servicing, the Agency disagrees that it is 
appropriate to be ``silent on this issue.'' By making the change to the 
rule as indicated, the Agency has narrowed the situations in which 
approval is required.
    Comment: One commenter recommended revising this paragraph to 
require Agency approval only on loans involving large-scale 
expenditures or loans. According to the commenter, requiring Agency 
pre-approval on every single loan or increase on line of credit is an 
undue burden on the lender, the Agency staff, and the borrower.
    Response: As noted in the response to the previous comment, the 
Agency has modified the provisions of this paragraph to require Agency 
approval only when the additional expenditure or loan would violate one 
or more of the loan covenants of the borrower's loan agreement and not 
for all additional expenditures and loans, as was proposed. As 
rewritten, the Agency believes its approval is necessary whenever a 
violation of the borrower's loan agreement would occur, regardless of 
the size of the additional expenditure or loan.
Lender Failure (Sec.  5001.17(k)) (Proposed Sec.  5001.17(i))
    Comment: One commenter asked if no successor entity can be 
determined in the event of a lender failure, does the Agency have the 
right or legal authority to enforce the provisions of the loan 
documents on the lender's behalf.
    Response: The Agency agrees that the situation identified by the 
commenter was not adequately addressed in the proposed rule and should 
have been. Therefore, the Agency has revised the rule to address 
situations where the lender ceases servicing the loan.
Delinquent Loans (Sec.  5001.17(l)) (Proposed Sec.  5001.17(j))
    Comment: One commenter asked why the lender has to coordinate this 
with the Agency at this time and suggested that the lender should be 
allowed to service the loan and advise the Agency as to what is being 
done.
    Response: The Agency agrees with the commenter that allowing the 
lender to implement appropriate curative actions for loans that are 
delinquent more than 30 days in accordance with its policies and 
procedures is sufficient and does not require coordination with the 
Agency and has removed this requirement from the rule. The Agency also 
revised the text to remove reference to coordination with the borrower 
because the text is unnecessary. The rule requires the lender to notify 
the Agency when a loan's classification has been downgraded (Sec.  
5001.4(b)(3)(iii)) and the Agency believes that this is sufficient 
notice in adverse situations.
Protective Advances (Sec.  5001.17(m)) (Proposed Sec.  5001.17(k))
    Comment: Four commenters provided comments on the level at which 
Agency approval of protective advances would be required.
    One commenter stated that, because protective advances are covered 
by the guarantee, this is a significant increase in risk to the 
government, and expressed concern that the subsidy calculations did not 
consider this additional exposure.
    Another commenter also expressed concern about the increase in risk 
to the government, stating that allowing a lender to advance $200,000 
of protective advances without concurrence from USDA is too large a 
sum, exposing the Government to significant additional losses. This 
commenter suggested that a more reasonable standard would be to require 
prior concurrence from USDA whenever cumulative advances exceed 
$25,000, and added that certain protective advances should be exempted 
from this cumulative total and should be authorized without USDA 
concurrence because they are clearly essential in preserving collateral 
(e.g., the payment of delinquent property taxes).
    On the other hand, another commenter stated that increasing 
protective advance expenditures to $200,000 without pre-approval is a 
good change and should remain.
    Response: In consideration of these comments, the Agency has not 
changed the level associated with protective advances for which Agency 
approval is required. Being a higher level than suggested by the 
commenter, there is no need to identify exceptions, such as the payment 
of delinquent property taxes. The Agency does not believe that the 
proposed levels increase Agency exposure because the Agency will pay to 
the lender under the guarantee no more that the guaranteed principal 
advanced to or assumed by the borrower and any interest due.
    Comment: One commenter recommended that the following language 
should be added:
    ``(a) The maximum loss to be paid by the Agency will never exceed 
the original principal plus accrued interest regardless of any 
protective advances made.
    (b) Protective advances and interest thereon at the note rate will 
be guaranteed at the same percentage of loss as provided in the Loan 
Note Guarantee.
    (c) Protective advances must constitute an indebtedness of the 
borrower to the lender and be secured by the security instruments.''
    Response: The Agency agrees with the commenter that these 
provisions are useful in ensuring protective advances are considered 
appropriately under this rule and has added these provisions to the 
rule. Specifically, the rule includes

[[Page 76752]]

the second and third suggestions in Sec.  5001.17(m)(4) and (6). The 
Agency has incorporated the commenter's first suggestion in Sec.  
5001.17(m)(7), although this maximum loss provision is slightly 
different than as suggested.
Liquidation (Sec.  5001.17(n)) (Proposed Sec.  5001.17(l))
    Comment: One commenter stated that a much more detailed section on 
liquidation is needed, as the guidance provided is scattered and 
incomplete. The commenter recommended adopting the rules used by the 
USDA FSA's guaranteed loan program (see 2-FLP paragraph 14; 7 CFR 
76.149), because, according to the commenter, FSA has had more 
experience with liquidations and loss claims and its regulations are 
more developed and thorough, as a result. The commenter then pointed 
out that FSA's rules are well-accepted by the agricultural lending 
community, which constitutes a significant share of Rural Development 
guaranteed lenders as well.
    Response: As described earlier in this preamble, the Agency has 
added some additional requirements to this part of the interim rule. 
The Agency believes these additions, in conjunction with the Agency's 
intent to use the handbook to provide additional guidance on 
liquidation, are sufficient to meet the commenter's concerns.
    Comment: Two commenters provided comments related to the last 
sentence in the introductory text to proposed Sec.  5001.17(l). The 
commenters questioned that, if the Agency concludes that liquidation is 
necessary, why would the security instruments be assigned to the 
Agency, especially because the lender is required to liquidate the 
collateral. The commenters suggested that this section be rewritten.
    Response: The proposed rule should have stated that, once the 
lender has assigned the security instruments to the Agency, the Agency, 
not the lender, will liquidate the loan. The Agency has modified 
proposed Sec.  5001.17(l) accordingly (see Sec.  5001.17(n)).
    Comment: One commenter disagreed with the 30-day suspension period 
in proposed Sec.  5001.17(l)(1), stating that rapid action is critical 
in liquidations. The commenter suggested that:
    (1) Liquidation should be allowed upon approval of the liquidation 
plan by the Agency;
    (2) The Agency should be required to approve or disapprove the 
lender's liquidation plan within five working days (not 30);
    (3) Although liquidation appraisals should be required as part of 
the liquidation planning process, they should not be absolutely 
required for liquidation plan approval, provided they are obtained 
prior to the completion of the liquidation; and
    (4) The Agency should continue the process of splitting the cost of 
liquidation appraisals and the authority for doing this should be 
spelled out here.
    Response: The Agency considered each of the commenter's suggestions 
for revising the proposed requirements for the liquidation plan. The 
Agency agrees with each of the commenter's suggestions, except for the 
suggestion that approval or disapproval be provided with five working 
days, rather than 30 working days. The 30-day period proposed was not 
and is not intended to be a suspension period, but was proposed to 
allow the Agency sufficient time to review the final liquidation plan 
and to either approve or disapprove it. The Agency anticipates that its 
decision on liquidation plans could take less time and, when possible, 
will do so.
    With regard to the commenter's other three suggestions, the Agency 
agrees and has modified the rule text to incorporate each suggestion. 
Specifically, if the outstanding principal loan balance including 
accrued interest is more than $200,000, the lender is required to 
obtain an independent appraisal report on all collateral securing the 
loan, which will reflect the current market value and potential 
liquidation value. All appraisals must meet the requirements set forth 
in the USPAP. If an environmental assessment of the property is 
necessary in connection with liquidation, the cost will be shared 
equally between the Agency and the lender.
Loss Calculations and Payment (Sec.  5001.17(p)) (Proposed 5001.17(n))
    Comment: One commenter stated that the paragraph discussing loss 
calculations and payment needs expansion to enable the lender to 
liquidate the collateral to establish the final loss. The commenter 
pointed out that lenders take title to collateral through, but not 
limited to, foreclosure process, deed in lieu of foreclosure, and 
bankruptcy process. The lender then liquidates the collateral and 
prepares final loss settlement as per proposed Sec.  5001.17(n)(3).
    Response: The Agency disagrees with the commenter that Sec.  
5001.17(p) (in the rule), Loss calculations and payment, needs to be 
expanded as suggested. The text in Sec.  5001.17(p) does not prohibit 
the lender from liquidating collateral (liquidation is covered in Sec.  
5001.17(n)). In addition, the methods identified by the commenter on 
how lenders may acquire title to collateral does not need to be 
addressed in the rule, but can be, as the Agency intends to do, covered 
in the handbook to the rule. Therefore, no changes have been made to 
the rule text in response to this comment.
    Comment: Three commenters requested the Agency reconsider proposed 
Sec.  5001.17(n)(3)(i) with regard to how the value of collateral 
obtained would be determined when calculating loss. Two of the 
commenters noted that the proposed rule states that the loss will be 
calculated based on the value of the collateral at the time the lender 
obtains title, but does not provide guidance on how the value of the 
collateral is to be determined. These commenters then asked: If an 
appraisal is obtained, would the Agency use the market value or 
liquidation value?
    The third commenter stated that the statement that loss should be 
based on collateral value is too vague, and suggested that the loss 
should be expressly based on the appraised liquidation value.
    Response: After considering these comments, the Agency has revised 
Sec.  5001.17(p)(5)(i) to reflect that the collateral's value for 
purposes of determining loss claim will be based on the liquidation 
value of the collateral.
    Comment: One commenter suggested that proposed Sec.  
5001.17(n)(3)(iii) state that the lender will request an estimated loss 
payment when liquidation is expected to exceed 90 days when a loss is 
anticipated. According to the commenter, such a provision would stop 
the interest accrual covered by the guarantee.
    The other commenter stated that, except in the case of bankruptcy-
related losses, estimated loss claims should be required on all 
liquidations that will take more than 90 days to complete.
    Response: The Agency agrees with the suggestion that, when a loss 
is anticipated, the lender must submit an estimated loss claim to the 
Agency when liquidation is expected to exceed 90 days. In addition, the 
Agency has revised the rule to make clear that, once the liquidation 
plan has been approved by the Agency, no more than an additional 90 
days of accrued interest will be payable.
Borrower Responsibilities (Sec.  5001.25)
    Comment: One commenter suggested that Sec.  5001.25(a)(3) be 
divided into two separate items. The commenter pointed out that 
consumer affairs is not related to protection of the environment, and, 
if anything, protection of the environment should be coupled with land 
use and zoning. The commenter stated that the

[[Page 76753]]

borrower should be prepared to supply both the lender and the Agency 
with a copy of all environmental permits and/or status of securing such 
permits as early in the planning process as possible.
    Response: The Agency has not divided Sec.  5001.25(a)(3) into two 
separate paragraphs as there is no substantive benefit obtained in 
doing so.
    With regard to the comment concerning environment permits and the 
status of securing such permits, the rule requires borrowers to obtain 
all permits, which would include all applicable environmental permits, 
under Sec.  5001.25(b). As the Agency has the right to request the 
permits at any time for any project if permits may be a concern, the 
Agency agrees that such permits should be obtained as early as 
possible, but that it is not necessary to include such language in the 
rule.
    Comment: One commenter noted that, regarding Sec.  5001.25(d), the 
Agency's contract is with the lender, not the borrower. The commenter 
questioned what gives the Agency the right to access the borrower's 
records, and also asked if the borrower shouldn't have to sign 
something acknowledging this?
    Response: Because borrowers are, at a minimum, third-party 
beneficiaries, the Agency has the right to access the borrower's 
records. While it is normal Agency practice for the Agency to work 
through lenders, the Agency may find it necessary to go to the 
borrower's records, especially in the case of a NAD appeal brought by 
the borrower. Finally, Form RD 5001-3 contains borrower certifications, 
which include acknowledgement of records access.

Basic Guarantee and Loan Provisions

General (Sec.  5001.30)

Conditions of Guarantee (Sec.  5001.30(b))

    Comment: One commenter noted they recognize that the proposed 
regulation has retained the requirement found in the existing programs 
that the guarantees issued will be ``guarantees of loss'' rather than 
``guarantees of payment''. We observe that most commercial guarantees 
today guarantee payment, rather than performance, to attract lenders 
when guarantees are needed. While a guarantee of payment may not be 
generally suitable for the Agency's loan programs, the selective use of 
a guarantee of payment by the Agency should be considered.
    Response: The Agency has not changed the rule as requested by the 
commenter. The rule implements current practice, which is the Agency's 
intent, and to modify it as suggested by the commenter would increase 
the cost to the program. Therefore, the Agency has not accepted the 
commenter's suggestion.
    Comment: Twenty six commenters provided comments in opposition of 
the proposal that ``the guaranteed portion would be paid first and be 
given preference and priority over the unguaranteed portion'' of loans. 
These commenters stated that the Agency should continue its current 
regulation that establishes ``the unguaranteed portion of the loan will 
neither be paid first nor given any preference or priority over the 
guaranteed portion''. The commenters also expressed their belief that 
the ``first loss'' proposed change would likely effectively kill the 
Business and Industry and CF guaranteed loan programs. Two commenters 
stated that this ``pari passu'' issue negates any material value of the 
guaranty by putting the lender more at risk than the agency and that it 
would also cloud any decisions in the liquidation process in favor of 
the agency.
    Response: The Agency agrees with commenters and revised the rule to 
adopt the prior methodology, which provides that the unguaranteed 
portion of the loan will neither be paid first nor given any preference 
or priority over the guaranteed portion.
Full Faith and Credit (Sec.  5001.30(c))
    Comment: One commenter noted that Sec.  5001.30(c)(1) states that 
any Loan Note Guarantee or Assignment Guarantee Agreement relating to a 
note which provides for payment of interest on interest is void. The 
commenter stated that this appears inconsistent with full faith and 
credit provisions.
    Another commenter stated that USDA should better define the 
prohibition against payment of interest on interest to include elevated 
default interest charges that apply to the entire loan. The commenter 
stated that USDA should not include language that voids a guarantee on 
a note that contains such prohibited interest on interest charges. The 
commenter further stated that USDA should never threaten to void a 
guarantee for anything short of fraud and misrepresentation and that if 
prohibited interest on interest is found after the fact, the loss 
occasioned by the prohibited charges should be negotiated downward, but 
no one should have the right to void the guarantee for what could be an 
oversight of the lenders standard note language.
    Response: In response to the comment that Sec.  5001.30(c)(1) 
appears to be inconsistent with full faith and credit provisions, the 
Agency points out that full faith and credit only applies on terms that 
the Agency has agreed to guarantee and that the Agency has not agreed 
to insure interest-on-interest. Therefore, there is no inconsistency.
    With regard to the comment concerning elevated default interest 
changes, the Agency does not consider elevated default interest charges 
to be interest-on-interest and, therefore, would not void the 
guarantee. As otherwise provided in the rule, the Agency requires all 
rates to be reasonable (reasonable rates and terms apply). The Agency 
does agree that the rule needs to be revised with regard to the voiding 
of the guarantee attached to or relating to a note that provides for 
payment of interest-on-interest. The Agency has revised the rule (see 
Sec.  5001.30(c)(1)) to state that ``any claim against a Loan Note 
Guarantee or Assignment Guarantee Agreement attached to, or relating 
to, a note that provides for payment of interest on interest will be 
reduced to remove interest on interest.''
Soundness of Guarantee (Sec.  5001.30(d))
    Comment: One commenter noted that Sec.  5001.30(d) requires all 
loans to be financially sound and feasible, with reasonable assurance 
of repayment, and suggested adding a less subjective requirement by 
also requiring all loans to meet or exceed the characteristics of a 
loan classified Special Mention by the Uniform Classification System as 
defined by the Agency, with no consideration being given to the 
guarantee.
    Response: The Agency does not accept the suggestion to replace the 
current language with a requirement that loans meet or exceed the 
characteristics of a loan classified as Special Mention. The Agency's 
intent is to provide general requirements in subpart A that will be 
common to all programs included in the rule as well as to programs that 
may be added in the future. In addition, the Agency believes that the 
commenter's suggestion is effectively provided for by revising subpart 
B for the Business and Industry guaranteed loan program in accordance 
with the following comment.
    Comment: Two commenters stated that the last sentence of 7 CFR 
Sec.  4279.101(b) should be added to Sec.  5001.30(d) for Business and 
Industry loans. The sentence reads: `` It is not intended that the 
guarantee authority will be used for marginal or substandard loans or 
for the relief of lenders having such loans.''
    Response: The Agency agrees with the commenters that this provision 
in the current Business and Industry guaranteed loan regulations should 
have

[[Page 76754]]

been included in this rule. Therefore, the Agency has modified subpart 
B for the Business and Industry program to include the suggested text 
(see Sec.  5001.103(j)(1)).

Reduction of Loss Claims Payable (Sec.  5001.30(f))

    Comment: One commenter stated that Sec.  5001.30(f) appears to give 
USDA much more opportunity to reduce the guaranty once a loan is in 
liquidation; therefore, pushing more of the risk back to the lender. 
The commenter recommended the rule regarding reduction of loss claims 
not be changed and that the current rule of bad faith or gross 
negligence be retained.
    Another commenter recommended deleting the negligent loan 
origination criteria and providing a clearer definition for loan 
origination. The commenter stated that the burden of possibly repaying 
the Agency for loss claims paid under the guarantee is of utmost 
concern for continuation by lenders in the program. The commenter 
further stated that a repayment to the Agency should be limited only to 
those instances where a lender commits fraud.
    Response: With regard to the comment concerning the current rule of 
bad faith or negligence be retained, the Agency notes that there is no 
standard currently for bad faith or negligence.
    With regard to the concerns expressed concerning negligent loan 
origination, as proposed, the only change that this paragraph made to 
existing rule text was to clarify that negligent loan origination can 
be a cause for reducing the guarantee. The proposed rule implements 
current practice and, thus, the Agency disagrees that this paragraph 
results in putting more risk back on the lender. To delete negligent 
loan origination from the rule would eliminate lender negligence as a 
cause for reducing the guarantee and the Agency disagrees with this 
result. Therefore, the Agency has retained this paragraph as proposed.

Guaranteed Loan Requirements (Sec.  5001.31)

Interest Rates (Sec.  5001.31(a))

    Comment: One commenter suggested that USDA clarify that interest 
rates, interest rate caps, and incremental adjustment limitations will 
be negotiated between the lender and the borrower and will be subject 
to Agency concurrence. The commenter also suggested that the rule 
should state that interest rate caps (annual and lifetime) and 
incremental adjustment limitations are required by the Agency in order 
for the lender to offer some long term stability to the borrower and 
the proposed facility. The commenter stated that because the revenues 
of facilities operated by non-profit organizations and public bodies 
are quite often largely dependent on State and Federal payments and 
user fees that cannot be readily increased on short notice, it is vital 
to the success of these types of community projects that they have some 
built in parameters to prevent sudden or substantial long term interest 
rate increases.
    Another commenter stated that prepayment penalties are a common 
practice in Business and Industry loans and suggested adding language 
stating that they are also a matter of negotiation between the lender 
and applicant.
    Response: The Agency agrees with the commenter's suggestion that 
the interest rates, interest rate caps, and incremental adjustment 
limitations negotiated between the lender and the borrower be subject 
to Agency concurrence and has modified this paragraph in the rule 
accordingly. The Agency will also provide additional guidance in the 
negotiated rate section of the handbook for this rule.
    With regard to the commenter's suggestion that the rule state that 
interest rate caps (annual and lifetime) and incremental adjustment 
limitations are required by the Agency in order for the lender to offer 
some long term stability to the borrower and the proposed facility, the 
Agency plans on addressing this in the handbook for the rule. Thus, no 
changes were made to the rule in response to this suggestion.
    Lastly, with regard to the suggestion to add language stating that 
prepayment penalties are also a matter of negotiation between the 
lender and applicant, the Agency does not believe it is necessary to 
address this specific matter in the rule. The rule does not preclude 
the lender and the borrower from negotiating and adopting prepayment 
penalties and the Agency does not believe it is necessary to interject 
itself in such matters. Therefore, the Agency has not revised the rule 
in response to this suggestion.
    Comment: One commenter noted that, currently, USDA guaranteed loans 
with a variable rate cannot vary more often than quarterly and that the 
proposed rule seemingly would allow daily variable rates. Another 
commenter stated that the Agency should allow for interest rate 
adjustments as often as the lenders desire; which is typically whenever 
the Prime rate changes (or other index used). Another commenter stated 
that variable interest rate adjustments due to changes in the base rate 
should not be allowed to occur more frequently than quarterly, while 
another commenter recommended that changes not be allowed more often 
than monthly.
    Response: As proposed, the rule allowed the lender and borrower to 
negotiate interest rate adjustments as often as desired. The Agency has 
the opportunity to consider the rates, terms, frequency of adjustment, 
etc., when the Agency issues the Loan Note Guarantee. Thus, there is no 
need to provide a specific rate of adjustment in the rule and the 
Agency has not modified the rule to specify a specific rate of 
adjustment.
    Comment: One commenter noted that Sec.  5001.31 requires the lender 
to provide the Agency with the overall effective interest rate for the 
entire loan for variable rate loans and questioned why the Agency cares 
about the effective interest rate, and what would be done with the 
information.
    Response: The Agency agrees that providing the overall effective 
interest rate does not need to be included in the rule and has removed 
this requirement from the rule.

Interest Rate Changes (Sec.  5001.31(b))

    Comment: One commenter noted that proposed Sec.  5001.31(b)(2) 
prohibits increases in interest rates except for normal fluctuations in 
variable rate notes. The commenter stated that the intent of this 
prohibition is not clear and questioned whether it is attempting to 
protect the borrower from lender actions. The commenter suggested not 
limiting or prohibiting customary lender practices, including increases 
in interest rates that are clearly disclosed in the loan documents and 
the lender underwriting and servicing policies and procedures.
    Response: The Agency agrees that the proposed rule text was too 
limiting. The Agency has revised the rule to allow increases in 
interest rates that are permitted in the loan documents (see Sec.  
5001.31(b)(3)).
    Comment: One commenter recommended amending the prohibition on the 
increase in interest rates. The commenter noted that there are times 
when a borrower continues to negotiate with the lender and a variable 
rate is changed to a fixed rate. A fixed rate option is generally at a 
higher initial rate; however, the borrower sometimes feels more 
comfortable for long-range planning with the fixed rate. This rule 
would prohibit what could be a borrower's request.
    Response: The Agency agrees with the commenter and has revised the 
rule to allow the situation described by the commenter (Sec.  
5001.31(b)(3)).

[[Page 76755]]

    Comment: One commenter stated that interest rate sensitivity should 
have been considered in the project's evaluation by the Agency and, 
thus, there should be no requirement to get a written concurrence to 
adjust the rate when it was proposed and approved as variable. The 
commenter stated that this requirement is excessive, onerous, and 
unnecessary and that it subjects the Conditional Commitment to 
uncertainty as a rate change may not be approved by the Agency.
    Two commenters stated that proposed Sec.  5001.31(b) should state 
that normal variable rate fluctuations do not need to be approved by 
the Agency.
    Response: The situations described by the commenters concern 
changes to variable interest rates. Variable interest rates are 
required in the rule to be tied to an index. When there is a change in 
the base rate of that index, the Agency agrees with the commenters that 
Agency concurrence is not needed--this is a normal fluctuation in the 
variable rate. Thus, the Agency has revised the rule to provide this 
exception to the requirement for Agency concurrence (Sec.  
5001.31(b)(3)). The Agency still believes that it is necessary for it 
to provide concurrence if the change to the variable interest rate is, 
for example, from ``prime plus one'' to ``prime plus three.'' This type 
of change in the spread of the variable interest rate would still 
require Agency concurrence in the rule. In addition, changes in fixed 
interest rate loans would also still require Agency concurrence.

Term Length (Sec.  5001.31(c))

    Comment: Three commenters stated that the term length provision is 
too flexible in allowing the lender to set the maximum term, ultimately 
only insisting that the term not exceed 40 years and that loan purposes 
should have stated maximum term limits, as they currently do in the 
Business and Industry program. Two commenters recommended: 30 years for 
real estate, 15 for machinery and equipment, and 7 for working capital. 
One commenter stated that loan terms for Business and Industry loans, 
except for those to municipalities, should be limited to 30 years. 
Another commenter recommended 7 years for working capital, 20 years for 
the useful life for equipment, and 40 years for real estate projects. 
This last commenter also stated that debt refinancing should be tied to 
the type of collateral used for the loan.
    Response: The Agency has determined not to provide more specific 
term limits in the rule, as requested by the commenters, in order to 
provide flexibility. With regard to tying debt refinancing to the type 
of collateral used for the loan, the Agency believes that the rule is 
sufficient to allow the Agency to provide specifics in the handbook to 
the rule. Therefore, the Agency has not modified the rule in response 
to these comments.

Loan Schedule and Repayment (Sec.  5001.31(d))

    Comment: One commenter noted that Sec.  5001.31 requires the lender 
to incorporate the provision for adjustment of payment installments 
into the Note when variable rate notes are used. The commenter stated 
that this is, presumably, to eliminate the possibility of a balloon 
payment and the possibility that the Agency would have to pay a loss. 
The commenter suggested that balloon payments be permitted. The 
commenter also stated that if a lender is not satisfied with a 
borrower's performance at the end of the term, and wishes to call the 
note and possibly liquidate the collateral, it is not clear why the 
Agency should interfere. The commenter stated that this would likely 
expedite the acceleration and liquidation process, and possibly reduce 
loss exposure. The commenter also pointed out that FSA permits 
balloons, and has good experience with it.
    Response: The agency remains concerned with allowing balloons under 
its guaranteed loan programs because balloons can cause hardship on the 
borrower/business and create agency risk and exposure. Therefore, the 
agency has not modified the rule as suggested by the commenter.

Maximum Loan Amounts (Sec.  5001.31(e))

    Comment: Two commenters noted that Sec.  5001.31(e) states the 
maximum amount that may be guaranteed will be determined on a program-
by-program basis and will be published each year in the Federal 
Register. The commenters questioned the need to publish this 
information when the maximum loan amount is contained in proposed Sec.  
5001.101(e)(1) for Community Facilities and proposed Sec.  
5001.103(g)(3) for Business and Industry. A third comment similarly 
asked why publish in accordance with Sec.  5001.31(e) when the limit is 
found in proposed Sec.  5001.101(e)(1).
    Response: The provisions in subpart B provide the ``default'' 
maximum loan amounts for these two programs. The program offices for 
these two programs may determine that they wish to impose a lower 
maximum loan amount in a given year. The provision for the annual 
Federal Register notice allows these two programs to reduce their 
maximum funding limits in any fiscal year. Therefore, the rule retains 
the paragraph questioned by the commenters.

Maximum Percent of Guarantee (Sec.  5001.31(f))

    Comment: One commenter stated that, as proposed, if the low 
documentation application is from a lender who does not have preferred 
status, the maximum percent guarantee that the Agency will consider for 
that loan is 10 percentage points lower than for a full documentation 
application. The commenter stated that this change may have a negative 
effect in encouraging new lenders to participate in the program. 
According to the commenter, new lenders usually find the numerous 
requirements of the guarantee program to be intimidating and, with a 
reduction in guarantee, may consider the program too burdensome for 
participation. The commenter stated that the guarantee is attractive to 
lenders who may not be able to participate in certain projects, for a 
variety of reasons, even though they would be sound loans, and 
concluded that the reduction in guarantee will act as a deterrent in 
this situation.
    Response: As noted in this preamble, the Agency has revised the 
rule to require all approved lenders to submit ``full documentation'' 
applications and, in addition, the Agency is removing the proposed rule 
provisions for ``low documentation'' applications. As a result, there 
is no longer a need for the accompanying 10% reduction in guarantee 
provision. The rule has been changed to reflect this.
    Comment: One commenter stated that the guarantee percentages should 
be different when comparing the four programs because of the 
significance of infrastructure versus development; non-profit/
municipality vs. for-profit. Another commenter recommended 
standardizing the guaranty percentages and suggested a consistent 80% 
regardless of loan size.
    Response: With regard to the comment that the guarantee percentages 
should be different when comparing the four programs because of the 
significance of infrastructure versus development; non-profit/
municipality versus for-profit, the Agency notes that the proposed rule 
did this and has been retained in the rule.
    With regard to the comment recommending standardizing the guaranty 
percentages and suggesting a consistent 80% regardless of loan size, 
the Agency disagrees with the recommendation and suggestion. Because 
different projects have different risks, the Agency uses adjustments in 
guarantee percentage as a mechanism to address project risk. In the 
context of

[[Page 76756]]

managing risk inherent in individual loan programs, including changes 
to a program subsidy scoring, the Agency, therefore, rejects the 
comment and the suggestion.

Fees (Sec.  5001.31(g))

    Comment: One commenter expressed concern that the renewal fee can 
be changed annually, with no parameters to limit the fees or the fee 
changes. The commenter stated that lenders will see renewal fees or, at 
the very least, renewal fees with no parameters as an unmanageable 
risk, thus limiting their interest in program participation. The 
commenter also stated that the use of a renewal fee will eliminate 
participation by a number of lenders.
    Response: The Agency has revised the rule to clarify that any 
renewal fee applied by a program will be that fee rate established at 
the time the loan is obligated and, thus, will not change over time 
(see Sec.  5001.31(g)(2)). The Agency understands that imposition of a 
renewal fee can create a disincentive to participate. However, the rule 
states that the provision for a renewal fee is ``as applicable,'' 
meaning that it will be applied on a program-by-program basis. It does 
not mean that each program will necessarily charge a renewal fee.
    Comment: One commenter stated that Sec.  5001.31(g)(2) indicates 
the fee rate is established ``at the beginning of the loan''. The 
commenter stated that this is ambiguous because the rate is tied to the 
fiscal year of the obligation. The commenter suggested the use of the 
following language: ``Renewal fee. As applicable, the renewal fee is 
assessed annually, is based on a fixed fee rate established at the time 
the loan is obligated, and will be calculated on the unpaid guaranteed 
principal balance as of close of business on December 31 of each year. 
The fee will be billed to the lender and may be passed on to the 
borrower.''
    Response: The Agency agrees with the commenter's suggested 
language, which replaces ``at the beginning of the loan'' with ``at the 
time the loan is obligated,'' and has made this revision to the rule.
    Comment: One commenter requested that Guaranteed Community 
Facilities be codified within the regulations at 1% of the guaranteed 
portion of the facility and also that the regulations reflect and 
codify no annual service fee for Guaranteed Community Facilities. The 
commenter explained that Community Facilities by definition are non-
profits and public bodies. The commenter also stated that increasing 
fees, particularly in an environment by which the Combined Program 
Platform may not delineate between the successes and challenges of the 
individual programs, may inhibit the long-term success of Guaranteed 
Community Facilities. The commenter added that by placing the 
determinant of fees within the Federal Register, particularly the 
success of the four programs is based on the blended default rate of 
for-profit and non-profit borrowers, the fees may become cost 
prohibitive to Community Facilities and to Waste and Waste Disposal 
Facilities.
    Response: The Agency reserves the right to modify the fees assessed 
for any guaranteed loan program, including the Community Facility 
program, based on a variety of factors, including Agency loss 
experience and the effect of such losses on a program's subsidy rate. 
Therefore, the Agency rejects the commenter's request to codify the 
guarantee fee at 1% for the Community Facility guaranteed loan program. 
In addition, as noted in a previous response, the Agency may determine 
it is desirable to implement a renewal fee for the Community Facility 
guaranteed loan program (or any other program) and reserves the right 
to do so. Therefore, the Agency similarly rejects the commenter's 
suggestion to codify no annual service fee for Community Facilities.
    Comment: One commenter stated that fees should be different when 
comparing these programs because of the significance of infrastructure 
vs. development; non-profit/municipality versus for-profit.
    Response: When implementing these programs under the rule, the 
Agency will consider fees on a program-by-program basis. This includes 
determining what guarantee fee levels to use for each program and 
whether to require a renewal fee and, if so, what level. Because the 
Agency will make these determinations on a program-by-program basis, it 
will take into account the differences noted by the commenter.

Lender Fees (Sec.  5001.31(h))

    Comment: One commenter stated that the proposed rule prohibits late 
payment charges from being covered by the Loan Note Guarantee and that 
the lender would be prohibited from adding such charges to the 
principal and interested due under any guaranteed note. The commenter 
expressed concern that a borrower would read this and think that they 
are not required to pay any late fees. The commenter explained that 
this is public information and, if read literally, could be construed 
to say that USDA loans cannot have that fee. The commenter suggested 
that this should be reworded and revised.
    Response: The Agency agrees with that commenter that this paragraph 
needs to make clear that lenders can have late payment charges, but 
that the Agency still wants to prohibit late payment charges from being 
covered by the Loan Note Guarantee. Thus, the Agency has modified this 
paragraph to explicitly state that lenders may ``levy reasonable, 
routine, and customary charges and fees, including late payment fees.'' 
In addition, the Agency has added language to this paragraph to 
specifically state, in part, that late payment charges are not covered 
by the Loan Note Guarantee.
    Comment: One commenter stated that Sec.  5001.31(h) needs to 
include ``make whole'' calculations for fixed rate funding. The 
commenter stated that when the lender provides a fixed rate to the 
borrower, which helps to mitigate the borrower's interest rate risk, 
the lender becomes exposed to potential funding losses if the loan does 
not go full term of the period of the fixed interest rate. The 
commenter suggested that this cost should be included as a collectable 
fee or cost in the case of default.
    Response: The Agency disagrees with the commenter and has not 
revised the rule as suggested. The situation being described by the 
commenter is a normal part of their business practice that the lender 
can account for in their terms and conditions with the borrower when 
arranging the loan. The Agency will guarantee loans with or without a 
prepayment clause. If an approved loan contains a prepayment clause, 
the prepayment fees are not covered by the Loan Note Guarantee.
    Comment: One commenter stated that it is common practice for 
lenders to increase the interest rate on loans in default and suggested 
that the language in this section be expanded to state that late 
payment charges and additional interest expense associated with default 
interest rates will not be covered by the Loan Note Guarantee. Another 
commenter also suggested that this paragraph be expanded to mention 
default penalty interest charges as well as not being covered by the 
guarantee.
    The first commenter also suggested removing the language 
prohibiting these charges from being added to the principal and 
interest due under any guaranteed note, and that the lender be required 
to thoroughly disclose charges and fees in appropriate loan documents. 
The commenter explained that these charges are common practice, and the 
agency should not prohibit the practice when the agency risk is 
mitigated by not covering them under the guarantee.
    The commenter suggested the following language for the section: 
``(h) Lender fees. The lender may levy

[[Page 76757]]

reasonable, routine, and customary charges and fees for the guaranteed 
loan provided they are similar to those charged other applicants for 
the same type of loan for which a non-guaranteed borrower would be 
assessed. Late payment charges and additional interest expense 
associated with default interest rates will not be covered by the Loan 
Note Guarantee. The lender will thoroughly disclose charges and fees in 
appropriate loan documents.''
    Response: The Agency agrees with the commenters that both default 
charges and additional interest expenses should not be covered by the 
Loan Note Guarantee and has modified this paragraph to reflect this. 
With regard to the suggestion that this paragraph also state that the 
``lender will thoroughly disclose charges and fees in appropriate loan 
documents,'' the Agency does not believe this is necessary because such 
disclosures are required by current disclosure regulations and do not 
need to be restated in this rule.

Conditional Commitment (Sec.  5001.32)

    Comment: Four commenters expressed varying levels of concern with 
the value of the Conditional Commitment and its relationship to the 
issuance of the Loan Note Guarantee and the closing and funding of the 
loan.
    One commenter stated that commercial lending is a just-in-time 
business and the current six-working-day reservation of funds period is 
completely incompatible for this reality. This commenter recommended 
that Conditional Commitments be issued on a same-day-as-approved basis 
until funding is exhausted. The commenter then stated that the 
reservation of funds process should absolutely be eliminated, at the 
very least for Business and Industry guaranteed loans, and ideally for 
all other USDA guaranteed loans as well.
    Two commenters expressed concern over the value of the Conditional 
Commitment and because of negative experiences over the last 12 months 
involving nearly $14 million over three loans (as detailed below) have 
implemented procedures whereby they will limit any future USDA loans to 
those where the Loan Note Guarantee is issued simultaneously with the 
closing and funding of the loan. The commenters point out that this 
will result in a dramatic decrease in the number of USDA loans that 
they will do in the future. One of the commenters stated that they 
would like to see the guarantee process handled the same way the SBA 
does to avoid these occurrences (see following paragraph) in the 
future.
    One commenter provided detailed experience on three loans to 
support their comments as follows:
    Over the past 12 months the Agency has denied issuing the Loan Note 
Guarantee on three loans totaling $13,700,000, which has been a serious 
matter for our company. In two of the loans, we relied on the 
Conditional Commitment issued by the Agency and disbursed loan proceeds 
in accordance with the Conditional Commitment. The disbursement period 
in each case was over several months. When the loans were fully 
disbursed, we requested the Loan Note Guarantee, but were denied 
because of an adverse change in the borrower. Although we, as the 
lender, did nothing wrong, the borrower's circumstances changed and we 
were denied the guarantee. In the third instance, we received a 
Conditional Commitment for a tug boat and two barges that were to be 
constructed in Oregon and Louisiana, respectively. We arranged for a 
local bank to provide the construction financing due to the long 
construction period and relied on the Conditional Commitment for the 
long term take out. Due to hurricane Katrina, the shipyards in 
Louisiana fell behind on their production and the delivery of the 
barges were delayed which caused the customer not meeting its 
projections for 2007, thus the Loan Note Guarantee was denied. This 
brought the credibility of Alaska Growth Capital into question with our 
local bank.
    A fifth commenter suggested that Lenders should continue to be 
required to submit certifications listed in the current 7 CFR 
3575.63(a)(1) through (14).
    Response: With regard to the comment that commercial lending is a 
just-in-time business and the current six-working-day reservation of 
funds period is completely incompatible for this reality, the Agency 
points out that the Agency's reservation of funds is an internal fund 
administration policy that is not governed by the proposed rule. Thus, 
the Agency has not made any changes to the rule in response to this 
comment.
    While the Agency understands the commenters concerns and 
frustrations with their recent experience, the Agency needs the ability 
to not issue the Loan Note Guarantee when there has been an adverse 
change. As stated in the Conditional Commitment: ``A Loan Note 
Guarantee will not be issued until the Lender certifies that there has 
been no adverse change in the Borrower's financial condition, nor any 
other adverse change in the Borrower's condition, for any reason, 
during the period of time from USDA's issuance of this Conditional 
Commitment to issuance of the Loan Note Guarantee regardless of the 
cause or causes of the change and whether the cause or causes of the 
change were within the Lender's or Borrower's control. The Lender's 
certification must address all adverse changes and be supported by 
financial statements of the borrower and its guarantors executed not 
more than 60 days before the time of certification. As used in this 
paragraph, the term ``Borrower'' includes any parent, affiliate, or 
subsidiary of the Borrower.''
    Finally, with regard to the comment concerning the certifications 
found in 7 CFR 3575.63(a)(1) through (14), the Agency will identify 
required certifications in the handbook to this rule.

Conditions Precedent to Issuing Loan Note Guarantee (Sec.  5001.33)

    Comment: One commenter stated that proposed Sec.  5001.33(a) 
appropriately requires the lender to pay the guarantee fee.
    Response: The Agency acknowledges the comment. This provision is 
now found in Sec.  5001.34(b).
    Comment: In reference to the requirement in proposed Sec.  
5001.33(b) that requires the lender to advise the Agency of plans to 
sell or assign any part of the loan, one commenter stated that it was 
unaware of any compelling reason to require this information in 
advance. The commenter stated that, if and when the Agency receives a 
lender's request to execute an Assignment Guarantee Agreement, the 
Agency acts on it.
    Response: The Agency agrees with the commenter and this provision 
has been removed from the rule.
    Comment: In reference to the requirement under proposed Sec.  
5001.33(c) to require the lender to certify that the prospective 
borrower or applicant has obtained all appropriate insurance, the 
commenter stated that, while this requirement is appropriate, it is not 
clear why this requirement was singled out.
    Response: The Agency agrees with the commenter that it is 
unnecessary to single out this certification requirement. Instead, the 
handbook to this rule and the Conditional Commitment form will include 
the various lender certification requirements. Thus, this provision has 
been removed from the rule.
    Comment: One commenter suggested a complete rewrite of proposed 
Sec.  5001.33, including the lender certification, as follows:
    ``Sec.  5001.33 Conditions Precedent to Issuance of Loan Note 
Guarantee. The Loan Note Guarantee will not be issued

[[Page 76758]]

until the lender, including a preferred lender, has paid the guarantee 
fee, and certifies to the following.
    ``(a) All conditions of the Conditional Commitment have been met.
    ``(b) The lender's current classification of the loan is Special 
Mention or better under the Uniform Classification System as defined by 
Rural Development, with no consideration being given to the guarantee. 
The loan is classified ----------.
    ``(c) The lender possesses and has analyzed the information 
specified in Sec.  5001.12 and has identified in its credit evaluation 
all significant risks that could potentially jeopardize the timely 
repayment of the loan in full.
    ``(d) No major changes have been made in the lender's loan 
conditions and requirements since the issuance of the Conditional 
Commitment, unless such changes have been approved by the Agency in 
writing.
    ``(e) All truth-in-lending and equal credit opportunity 
requirements have been met.
    ``(f) The loan has been properly closed. The borrower has 
marketable title to all the collateral. The liens on the collateral 
have been perfected with the priority consistent with the requirements 
of the Conditional Commitment. No claims or liens of laborers, 
subcontractors, suppliers of machinery and equipment, or other parties 
have been or will be filed against the collateral and no suits are 
pending or threatened that would adversely affect the collateral when 
the security instruments are filed. Any exceptions must be thoroughly 
disclosed in the certification.
    ``(g) All loan proceeds have been disbursed for purposes and in 
amounts consistent with the Conditional Commitment and the application. 
A copy of the detailed loan settlement statement of the lender must be 
attached to support this certification. Appropriate lender controls 
were utilized to assure that all funds were properly disbursed, 
including funds for working capital.
    ``(h) All required personal, partnership, and corporate guarantees 
have been obtained.
    ``(i) All planned property acquisition has been completed. All 
development has been substantially completed in accordance with plans 
and specifications, and in conformance with applicable Federal, state, 
and local codes. The lender is to disclose any costs that exceeded the 
project costs identified in the Conditional Commitment and the 
application.
    ``(j) There has been neither any material adverse change in the 
borrower's financial condition nor any other material adverse change in 
the borrower, for any reason, during the period of time from the 
Agency's issuance of the Conditional Commitment to issuance of the Loan 
Note Guarantee regardless of the cause or causes of the change and 
whether or not the change or causes of the change were within the 
lender's or borrower's control. The lender must disclose any 
assumptions or reservations in the requirement and must disclose all 
adverse changes of the borrower, any parent, affiliate, or subsidiary 
of the borrower, and guarantors.
    ``(k) None of the lender's officers, directors, stockholders, or 
other owners (except stockholders in an institution that has normal 
stock share requirements for participation) has a substantial financial 
interest in the borrower and neither the borrower nor its officers, 
directors, stockholders, nor other owners has a substantial financial 
interest in the lender. If the borrower is a member of the board of 
directors or an officer of a Farm Credit System (FCS) institution that 
is the lender, the lender will certify that an FCS institution on the 
next highest level will independently process the loan request and act 
as the lender's agent in servicing the account.
    ``(l) Required hazard, flood, liability, worker compensation, and 
personal life insurance, when required, are in effect.
    ``(m) The Loan Agreement includes all measures identified in the 
Agency's environmental impact analysis for this proposal (measures with 
which the borrower must comply) for the purpose of avoiding or reducing 
adverse environmental impacts of the proposal's construction or 
operation.
    ``(n) If the lender is unable to provide any of this certification, 
provide a full explanation as a part of its certification.''
    Response: The Agency appreciates the commenter's extensive 
suggestions on this section. In light of the commenter's suggestions 
and a reconsideration of the current programs' requirements, the Agency 
has decided to enumerate in the rule specific conditions to be met 
prior to the issuance of the Loan Note Guarantee. Many of these 
conditions are as suggested by the commenter. The disposition of each 
of the commenter's suggestions is discussed below.
    Concerning the commenter's proposed Sec.  5001.33(a), the Agency 
agrees with the concept, which was contained in proposed Sec.  5001.33. 
In the rule, we have incorporated this in Sec.  5001.33(a)(9). In 
addition, the Agency will provide further instruction in the handbook 
for the rule.
    Concerning the commenter's proposed Sec.  5001.33(b), the Agency, 
as noted in a response to an earlier comment, does not plan to 
incorporate in the rule the current classification of the loan as 
Special Mention or better. Therefore, the Agency is not incorporating 
this suggestion in the rule.
    Concerning the commenter's proposed Sec.  5001.33(c), the lender 
will have conducted their lender's analysis, which is required under 
Sec.  5001.12, and will have submitted it to the Agency. The lender 
will, thus, already have in their possession this analysis. Therefore, 
the Agency does not believe it is necessary to include this suggestion 
as a requirement for the issuance of the Loan Note Guarantee.
    Concerning the commenter's proposed Sec.  5001.33(d) that no major 
changes have been made in the lender's loan conditions and requirements 
since the issuance of the Conditional Commitment, unless such changes 
have been approved by the Agency, the Agency agrees that this needs to 
be addressed and has included it in the rule (Sec.  5001.33(a)(1)).
    Concerning the commenter's proposed Sec.  5001.33(e) that all 
truth-in-lending and equal credit opportunity requirements have been 
met, even though the rule requires that lenders comply with all Federal 
law, which applies to both truth-in-lending and to equal credit 
opportunity, the Agency believes that stating this as part of the 
requirements for the issuance of the Loan Note Guarantee is useful 
(Sec.  5001.33(a)(4)).
    Concerning the commenter's proposed Sec.  5001.33(f), the Agency 
has included the provisions currently found in the Business and 
Industry guaranteed loan program, which are very similar to what the 
commenter recommended. The Agency did not accept the commenter's 
suggestion that the ``borrower has marketable title to all the 
collateral,'' because that language is not as effective in protecting 
the security as the current Business and Industry language. The Agency 
also did not accept the commenter's suggested language ``Any exceptions 
must be thoroughly disclosed in the certification'' because the Agency 
will not allow for any exceptions.
    Concerning the commenter's proposed paragraphs (g) and (j) through 
(m), the Agency notes that these are the same as currently found in the 
Business and Industry guaranteed loan rule and the Agency has included 
these in the rule.

[[Page 76759]]

    Concerning the commenter's proposed Sec.  5001.33(h), the Agency 
has incorporated the corresponding provision found in the current 
Business and Industry guaranteed loan regulation, which is essentially 
the same as suggested by the commenter.
    Concerning the commenter's proposed Sec.  5001.33(i), the Agency 
has incorporated the corresponding provision found in the current 
Business and Industry guaranteed loan regulation, which is similar to 
what the commenter suggested except for the treatment of costs. The 
commenter suggested that the lender be required to disclose ``any costs 
that exceeded the project costs identified in the Conditional 
Commitment and the application,'' which is different from the current 
Business and Industry guaranteed loan rule which states ``costs have 
not exceeded the amount approved by the lender and the Agency.'' The 
Agency rejected the commenter's suggested alternative treatment of 
costs because this would notify the Agency after such costs were 
incurred and the Agency wants to know conditions before such excess 
costs are incurred.
    Concerning the commenter's proposed Sec.  5001.33(n), the Agency 
has incorporated the intent of the lender's suggested language in Sec.  
5001.33(b).
    Comment: One commenter stated that the proposed rule is nearly 
silent on whether or not USDA will guarantee loans prior to the 
completion of construction--aside from prohibiting it for Section 9006 
guarantees at Sec.  5001.104(f)(1). The commenters stated that 
construction-related risks represent a major exposure to any guaranteed 
loan program, and currently the acceptance of such risks under the 
guarantee is discouraged. For example, 7 CFR Sec.  4279.156(b) sets 
forth a set of practices expected to offset this risk. The commenter 
recommended that, at the very least, these should be incorporated into 
the new regulation.
    The commenter also recommended that this should be accompanied by a 
policy of dropping the guaranteed loan percentage by 10 points if the 
guarantee will be issued prior to the completion of development work 
and a provision could then be included to increase the percent of 
guarantee by 10 points after the construction is successfully completed 
and the construction risk is over.
    Response: The Agency has considered this issue with regard to each 
of the guaranteed loan programs included in the rule. The Agency has 
determined that it will guarantee loans prior to construction being 
completed only for the Business and Industry guaranteed loan program. 
The Agency will not guarantee loans prior to construction being 
complete for Community Facilities, Water and Waste Disposal Facilities, 
and Rural Energy for America programs. The Agency will also consider 
reducing the loan guarantee by 10 percentage points for Business and 
Industry loans, as discussed in the following paragraph.
    For projects other than turnkey operations where the Loan Note 
Guarantee will be issued at the time of loan closing, there are added 
risks to the Agency. In considering the conditions under which the 
Agency will guarantee Business and Industry loans prior to construction 
being completed, the Agency will consider, during the review process, 
the added risk associated with issuing the Loan Note Guarantee prior to 
the substantial completion of the project. When negotiating the percent 
of guarantee with the lender, these risks will be considered in 
conjunction with the credit risks and the lender's experience in 
financing the type of project. The percent of guarantee will be reduced 
by a minimum of 10% where the Agency determines that this is warranted.
    Comment: One commenter suggested adding a new paragraph to this 
section as follows: ``The lender has certified that the borrower has 
secured any and all necessary environmental permits and all Agency 
recommended mitigation measures have been adopted and implemented 
appropriate to the proposal.''
    Response: The rule covers environmental requirements elsewhere in 
the regulation and the Agency does not see the need to repeat, or to 
move, them here. Therefore, the Agency has not implemented the 
commenter's suggestion.

Issuance of the Guarantee (Sec.  5001.34)

    Comment: In reference to the proposed Sec.  5001.34(a) requiring 
the lender's certification be provided at loan closing, one commenter 
stated that the lender should not be asked to provide its certification 
until it is requesting the guarantee because the borrower or lender may 
still be working out some agency imposed conditions, and that is okay.
    Response: The Agency agrees with the commenter's suggestion that 
the lender's certification be submitted at the time the lender requests 
the guarantee. The Agency has incorporated this suggestion in the rule 
(see Sec.  5001.34(b)).
    Comment: In reference to the proposed requirement that the 
guarantee fee be paid at loan closing in proposed Sec.  5001.34(a), one 
commenter stated the guarantee fee should be paid when the Loan Note 
Guarantee is being issued, not at loan closing. According to the 
commenter, if the fee is paid early, and then the borrower/lender 
cannot meet all conditions to issue the guarantee, the fee would/may 
have to be refunded, and Sec.  5001.31(g) says the fees are not 
refundable.
    Response: The Agency agrees with the commenter's suggestion that 
the guarantee fee not be paid at loan closing. The rule requires the 
guarantee fee to be paid when the lender requests the Loan Note 
Guarantee (see Sec.  5001.34(b)).
    Comment: One commenter referred to the portion of the last sentence 
in proposed Sec.  5001.36(a) that reads ``except that a change in the 
legal entity may be approved when the borrower is replaced with 
substantially the same individuals or officers with the same interest 
as originally approved'' and asked if this is referring to ownership 
interest and if it is, then revise the language to say so.
    Another commenter recommended deleting ``with the same interest'' 
in this same portion of the last sentence. According to the commenter, 
keeping ``with the same interest'' could require undue hardship on 
Agency personnel to process cancellations and reapplications, while not 
including it should still result in satisfactory protection of the 
interest of the Agency.
    Response: With regard to the commenter's request for clarification 
on the ``exception'' language, the Agency agrees that as proposed this 
language was unclear as to its meaning. In the rule, the Agency has 
deleted this ``exception'' language and Agency approval is required for 
a substitution of borrower(s) or change in the form of legal entity. 
Note that the deletion of the ``exception'' clause removes the ``with 
the same interest'' phrase on which the second commenter expressed 
concern. The Agency will provide guidance in a handbook to address such 
issues as raised by both commenters.

Sale or Assignment of Guaranteed Loan (Sec.  5001.37)

    Comment: Two commenters suggested that the Agency add a new section 
to incorporate RD AN 4240 to generate an agency form and certificate 
for lenders selling their excess servicing fee to a third party. The 
commenters suggested patterning this form after SBA's Confirmation of 
Originators Fee, but that USDA's form should be between the selling 
lender and the purchasing third party because the Agency has no 
centralized servicing agent like SBA. According to the commenters, a 
standardized form should make

[[Page 76760]]

secondary market sales of servicing fees uniform, encouraging more 
investors thereby generating lower rates for borrowers.
    Response: Form RD 5001-6, Agency Assignment Guarantee Agreement, 
has a provision for servicing fees. Therefore, the rule does not need 
to have a section added as suggested by the commenters.
    Comment: One commenter noted that proposed Sec.  5001.37(a)(2) 
requires the lender to retain sufficient interest to perform its duties 
under this part and asked ``How much interest is sufficient?'' and 
``How will this be enforced?''
    Response: In response to this and comments made on proposed Sec.  
5001.37(a)(6), the Agency has rewritten Sec.  5001.37(a)(2) to require 
that all lenders maintain a minimum 5% exposure to all loans. The 
revised paragraph no longer refers to ``retain sufficient interest.''
    Comment: Nine commenters stated that all lenders should be required 
to have a minimum of 5% exposure on any guaranteed loan and recommended 
removal of the provision allowing preferred lenders not to have any 
exposure on a loan found in proposed Sec.  5001.37(a)(6). The 
commenters gave several reasons for this recommendation.
    Two commenters stated that allowing any lender to not have any 
exposure to the loan they are servicing will complicate servicing on a 
defaulted loan. According to the commenter, based on the commenter's 
experience, a lender will not want to spend the money to liquidate a 
loan in which they have no financial interest. The commenter also 
stated that there is no advantage to the business in allowing the 
lender to participate out the unguaranteed portion since there is no 
participant that will provide the types of rates and terms the 
secondary market makes available for the guaranteed portion.
    One commenter stated that if preferred lenders are not required to 
retain any portion of the loan, there is little incentive for them to 
service the loan properly.
    One commenter stated that the provision to sell 100% of the loan 
appears to ``cater to the nontraditional lender who is who is 
undercapitalized and probably not the best partner to have with a 
guaranteed loan portfolio, because most banks retain the entire 
unguaranteed portion of the loan anyway. The commenter suggested that 
this change should not be allowed to occur, but if it does go forward, 
the commenter suggested clarification concerning who can sell 100% of 
the loan.
    Two commenters stated that all lenders should be required to retain 
5% of the entire loan, which must be an unguaranteed portion because 
this keeps the lenders at risk. However, lenders in good standing 
should be able to securitize 95% of their loans.
    One commenter stated that the provision to allow selling of 100% of 
the loan is not a prudent provision because it contravenes the 
fundamental guaranteed principle of share risk. Similarly, another 
commenter stated that this effectively eliminates any exposure on the 
part of the preferred lender and all lenders should be required to 
retain a minimum of 5% of the loan from the unguaranteed portion so the 
originating lender will share in the loan's risk.
    Finally, one commenter was concerned that this provision, in 
conjunction with the low documentation application process, could lead 
to poor lending practices because the preferred lender would not have 
to risk its own capital on the project. According to the commenter, 
this could in turn lead to an increase in defaulted projects. The 
commenter further stated that such ``no risk'' lenders would have no 
incentive to monitor or service loans, a function that is vital to the 
success of the four guaranteed loan programs. The commenter expressed 
specific concern about the potential effect on a default on a project 
by a municipality, stating that the municipal finance industry is ultra 
conservative and a default by a municipality on a project has not only 
a detrimental effect on that entity but can cause a ripple effect 
throughout a state or region, resulting in higher borrowing costs for 
public entities.
    Response: The Agency agrees with the commenters that all lenders 
should be required to maintain a minimum 5% exposure and that the 
proposed provision to allow preferred lenders to have no exposure on a 
loan is unnecessary and could lead to increased risk. Therefore, the 
rule requires all lenders to maintain at least a 5% interest in all 
loans.
    Comment: One commenter requested that the last sentence of proposed 
Sec.  5001.37(a)(6), which reads ``Lenders may sell the remaining 
amount of the un-retained amount of the loan [un-guaranteed portion], 
only through participation'' be changed. According to the commenter, 
this language is acceptable for loans but incorrect for bonds. Bonds 
would typically be sold, whether guaranteed or un-guaranteed portions. 
The un-guaranteed portions would be clearly defined as not being 
guaranteed.
    Response: While the Agency agrees with the commenter that the 
phrase ``only through participation'' is appropriate for loans and not 
for bonds, making this and other changes to the rule, this paragraph is 
no longer required. Thus, the Agency has removed this paragraph from 
the rule.
    Comment: Two commenters stated that the first sentence in proposed 
Sec.  5001.37(b), which reads ``The lender's servicing fee will stop 
when the Agency purchases the guaranteed loan portion of the loan from 
the secondary market,'' is misleading because the lender's servicing 
fee actually stops at the time of the last principal payment by the 
borrower. This is true because, according to the Lender's Agreement, 
the lender cannot charge the Agency a servicing fee, and when the 
Agency purchases the guaranteed portion from the holder it assumes the 
principal and accrued interest which cannot be charged a servicing fee. 
For instance, if the last principal payment by the borrower was July 
1st and the Agency repurchased the guaranteed portion from the holder 
on October 1st, there is 3 months interest included that the lender 
cannot charge a servicing fee on because the Agency is the holder. So 
the servicing fee actually was stopped on July 1st not October 1st.
    Response: The commenters are correct in pointing out that the first 
sentence is misleading for the reasons cited by the commenters. 
Therefore, the Agency has removed this sentence from the rule. The 
commenters are also correct in pointing out that the lender cannot 
charge the Agency for servicing fees. The Agency has revised and 
renamed this paragraph to address provisions associated with servicing 
fees, which includes, in part, this prohibition on charging servicing 
fees to the Agency. In addition, the revised paragraph states that such 
fees are not covered under the guarantee.
    Comment: Three commenters were concerned about the second part of 
the sentence in proposed Sec.  5001.37(b), which reads ``all loan 
payments and collateral proceeds received will be applied first to the 
guaranteed loan.''
    One commenter stated that this language is not clear and asked what 
happens when the guaranteed loan is in a junior position.
    One commenter stated that it is the word ``first'' that is 
confusing, asking ``Aren't all loan payments and collateral proceeds 
(net of liquidation costs) supposed to be applied against the 
guaranteed loan until it is paid in full?'' This commenter then 
referred to

[[Page 76761]]

comments submitted on Sec.  5001.30(b)(1) concerning the payment of the 
guaranteed portion of the loan being paid first and given preference 
and priority over the unguaranteed portion.
    One commenter recommended that this language be deleted because it 
will prevent most lenders and buyers of loans from participating in the 
guaranteed loan program. The commenter recommended instead the 
following language, which has been used in the past: Will be applied 
first to the guaranteed loan and, when applied to the guaranteed loan, 
will be applied on a pro rata basis.
    Response: The Agency agrees with the commenters that the proposed 
language was not clear with regard to guaranteed loans in a junior 
position and the concern over the payment of loans. Therefore, the 
Agency has modified this provision (see Sec.  5001.37(c)(3)) to state 
that all loan payments and collateral proceeds received will be applied 
to the guaranteed and unguaranteed portions of the loan on a pro rata 
basis.

Community Facilities Program (Sec.  5001.101)

    Comment: One commenter requested that Community Facilities be 
removed from the combined platform. This commenter stated that 
underwriting and other aspects of lending to for-profit vs. non-profit 
organizations is very different, and merging the programs invites 
confusion in interpretation and in application of the programs.
    Response: The Agency has intentionally developed a unified platform 
for the implementation of these guaranteed loan programs and for the 
incorporation of new authorized guaranteed loan programs in the future. 
The Agency understands that this results in the inclusion of guaranteed 
loan programs that have different characteristics, as indicated by the 
commenter. By using subpart A to identify common provisions and subpart 
B for program-specific provisions, the rule obtains, in part, an 
efficiency in the implementation of all guaranteed loan programs and 
minimizes the potential for confusion. Therefore, the Agency has 
retained the Community Facilities guaranteed loan program in the 
proposed rule.

Project Eligibility (Sec.  5001.101(a))

    Comment: One commenter noted that wherever possible, the Agency 
should allow for refinancing of the current debt structure, up to 100% 
of the funds represented by the current request, and requested that the 
50% limitation for refinance of existing indebtedness be restated as 
follows:
    ``(vi) Refinancing debts incurred by, or on behalf of, a community 
when all of the following conditions exist:
    (A) The total debt service payments after refinance are less than 
the current total service payments without an extension of the maturity 
date,
    (B) The debts were originally incurred for the facility or service 
being financed or any part thereof (such as interim financing, 
construction expenses, etc.), and
    (C) The proposed refinance represents a legitimate transaction. 
Care must be taken to ensure the refinance is not coupled with a 
conversion from for-profit to non-profit with a management contract 
provided by the previous For-Profit owners or companies/subsidiary 
under control of the previous for-profit owners.''
    Response: The Agency's experience with making guaranteed loans for 
community facilities is that there needs to be a balance between 
providing loan guarantees to new rural services and refinancing 
existing loans. The Agency does not believe that allowing 100% 
refinancing is consistent with the goal of providing new rural 
services. Limiting refinancing to 50% represents, based on Agency 
experience, the appropriate balance. Therefore, the Agency has not 
modified the provisions concerning the refinancing of the minority 
portion of the debt. The Agency notes that it has revised the 
refinancing requirements to include the commenter's second suggestion 
(i.e., debts incurred for the facility or service being financed or any 
part thereof (such as interim financing, construction expenses, etc.)).
    Comment: One commenter stated that if hydroelectric generating 
facilities and natural gas facilities are eligible, then other power 
generating facilities should be included, especially if it is an 
alternative and/or clean/energy/green energy project.
    Response: Other power generating facilities are eligible for a 
Community Facilities guaranteed loan if they are part of an improvement 
to an already eligible community facility. In such instances, the 
Agency plans to continue to fund alternative energy projects. The rule 
does not need to be revised in order for the Agency to continue to fund 
such projects. Therefore, no changes have been made to the rule in 
response to this comment.
    Comment: One commenter requested that the criteria for leased space 
(proposed Sec.  5001.101(a)(3)) be expanded to represent 75% 
utilization of the facility for benefit of community services based on 
shared/common space measured as a percentage of total square feet floor 
space, and shared/common time usage of the space measured as a 
percentage of annual usage.
    Response: The suggestion by the commenter is essentially the same 
as what the rule requires, but would add to it the calculation of the 
``shared/common time usage of space measured as a percentage of annual 
usage.'' To implement the commenter's suggestion would require the 
keeping of records of how often each space is used. The Agency does not 
have the administrative resources necessary to verify and monitor time 
usage. Therefore, the Agency does not believe that this suggestion is 
practical or necessary and has retained the provision in the rule as 
proposed.
    Comment: Two commenters addressed the issue of demonstration of 
community support (proposed Sec.  5001.101(a)(5)). Both commenters 
noted that the rule gives the option to either satisfy the cash equity 
requirement or demonstrate community support. One commenter believed 
that a community facility project should always demonstrate significant 
community support. Another commenter recommended revising the section 
as follows: ``Section 5001.101 (a)(5)(i)--Evidence of tangible 
community support such as community fund raising, assignments of tax 
revenues, or grants from other organizations and when required by Sec.  
5001.101 (a)(5)(ii) a certificate of support.''
    Response: With regard to the comment that community facility 
projects should always demonstrate significant community support, the 
Agency believes that there is no increase in risk if a community 
facility project could demonstrate the equivalent financial metric (at 
proposal, this was cash equity; in the rule, it is debt-to-tangible net 
worth ratio). Therefore, the Agency believes that it is still 
reasonable to allow the option to demonstrate either.
    With regard to the comment suggesting to revise Sec.  
5001.101(a)(6)(i), which reads ``Evidence of community support in the 
form of a certification of support for each project or facility from 
any affected local government body is required,'' the Agency believes 
that requiring evidence of ``tangible'' community support would 
eliminate too many viable and worthwhile projects. Therefore, the 
Agency has not accepted the commenter's suggested revision and has 
retained this paragraph as proposed in the rule.

[[Page 76762]]

Unauthorized Projects and Purposes (Sec.  5001.101(b))

    Comment: One commenter stated that the proposed definition of 
conflict of interest limits the award of a contract to another party 
only when they will retain an interest in the borrower; the language 
would not include a member of the board of directors awarding a 
contract during the origination phase and then withdrawing from the 
board of directors. According to the commenter that, while the 
definition actually indicates that it includes but is not limited to, 
it may also provide a supportable defense when the person clearly 
intends to withdraw prior to contract ratification. Therefore, the 
commenter proposed amending the proposed regulation as follows: ``Sec.  
5001.101(b)(7) Any project where an individual, or membership of 
another organization sponsors the creation of a nonprofit organization 
with the intent to control negotiations for employment or contracts 
that provide financial benefit to the sponsoring organization, 
affiliate organization, or a subsidiary organization of the sponsoring 
individuals or organization.''
    Response: The Agency agrees with the concern raised by the 
commenter and the rule addresses the commenter's concern. Rather than 
creating a new paragraph as suggested by the commenter, the rule relies 
simply on the concept that any project that creates a conflict of 
interest or an appearance of a conflict of interest is prohibited. The 
rule no longer defines ``conflicts of interest.'' Instead, the Agency 
will rely on guidance in the handbook to the rule to address conflicts 
of interest, including the situation posed by the commenter.

Borrower Eligibility (Sec.  5001.101(c))

    Comment: One commenter stated that the proposed rule would allow 
lenders to make loans to for-profit borrowers without restrictions to 
distribution of profit. The commenter made three recommendations to 
remedy this:
    (1) Require in the definition of an essential community facility 
that all community facilities be operated on a nonprofit basis;
    (2) Require that eligible borrowers for an essential community 
facility be a public body or nonprofit corporation; and
    (3) Require that all essential community facilities operate as 
though they were nonprofit entities.
    Response: The Agency has revised the borrower eligibility 
requirements to focus on those borrowers that are the intended clients 
for the Community Facilities guaranteed loan program--public bodies, 
not-for-profit entities, and Indian tribes. This revision accommodates 
the commenter's second suggestion and main concern. The Agency does not 
believe it is necessary to implement the other two suggestions in order 
to target the Community Facilities program to its intended clients.
    Comment: Two commenters recommended deleting the ``credit not 
available elsewhere'' requirement (proposed Sec.  5001.101(c)(3)). One 
commenter stated that this is the one area that should follow the 
current Agency Guarantee Business and Industry procedure and not 
require this documentation from the lender or Agency determination. The 
other commenter requested that the requirement for Community Facilities 
to show proof of inability to obtain credit at reasonable pricing, 
terms, and conditions be deleted. According to this commenter, the 
requirement may be appropriate for Business and Industry (for-profit 
ventures), but is not relevant to non-profit and public organizations 
serviced through Community Facilities.
    Response: The Agency cannot remove this provision from the 
Community facility program because it is a requirement under the 
program's authorizing statute.
    Comment: One commenter stated that the credit not available 
elsewhere requirement conflicts with Sec.  5001.16.
    Response: The Agency disagrees with the commenter that there is a 
conflict between these two provisions. A borrower may be credit worthy 
as required under Sec.  5001.16, but this does not mean that the 
borrower is able to receive a loan at reasonable rates and terms, which 
is the relevant test for ``credit not available elsewhere.''
    Comment: One commenter requested more written examples of eligible 
community facilities, including rural health clinics, first responders, 
immediate care centers, assisted living facilities, nursing homes, 
roads, toll roads, bridges, ports, airports, charter schools, day care, 
YMCA, YWCA, Girl Scouts, Boy Scouts, university/college/technical 
schools for education/multipurpose, and community student housing.
    Response: The list provided in the proposed rule was not intended 
to be an exhaustive list; other examples will be provided in the 
handbook to the rule. The organizations listed in the referenced 
paragraph do not meet the normal requirements of an eligible borrower. 
Therefore, the Agency has listed these four organizations separately to 
ensure that they continue to be eligible for Community Facilities 
guaranteed loans.

Additional Application Documentation Provisions (Sec.  5001.101(d))

    Comment: One commenter stated that guidance should be provided that 
explains when a Feasibility Study is necessary (e.g., in a Staff 
instruction or Handbook).
    Response: The Agency agrees with the commenter and will provide 
additional guidance and instruction on when a feasibility study is 
necessary within the handbook to the rule.

Additional Guarantee- and Loan-Related Requirements (Sec.  5001.101(h)) 
(Proposed Sec.  5001.101(e))

    Comment: One commenter requested that no limit be placed on 
Guaranteed Community Facilities, and that the State and Program 
Directors be allowed to administer funding for the greatest benefit 
rather than imposing a regulatory limit. According to the commenter, 
while the premise for the limit is credible, under the current economic 
environment Rural Development encourages joint efforts by rural 
communities to consolidate services, when reasonable and when services 
will not be compromised. In addition, county-wide or joint community 
projects may well exceed $50 million and may be fully justified.
    Response: The Agency has not revised the rule as requested by this 
commenter. The funding limit allows the Agency to better diversify its 
portfolio, improve risk management, and provide for a greater 
geographic distribution of funds.
    Comment: Two commenters expressed concern over the proposed parity 
lien requirements. One commenter recommended deleting the parity lien 
requirements, because this is an undue requirement for lenders since 
they will be harder to obtain approval from lender boards, especially 
considering non-profit status in addition to the other high risk 
factors. The other commenter stated that this requirement has hurt the 
promotion of the guaranteed CF loan program, and recommended that the 
loan approval officer be given the option to approve a Guaranteed CF in 
first lien position.
    Response: The Agency disagrees with the recommendation to delete or 
modify this requirement, which implements current Agency policy, 
because to do so would reduce lender risk, which defeats the concept of 
shared risk, one of the goals of the new platform. In addition, such 
changes would have a negative effect on program costs and reduce the 
number of viable projects that the Agency can finance.

[[Page 76763]]

Water and Waste Disposal Facilities (Sec.  5001.102) Borrower 
Eligibility (Sec.  5001.102(c))

    Comment: One commenter stated that the credit not available 
elsewhere requirement conflicts with Sec.  5001.16.
    Response: As noted in a previous response, the Agency disagrees 
with the commenter that there is a conflict between these two 
provisions. A borrower may be credit worthy as required under Sec.  
5001.16, but this does not mean that the borrower is able to receive a 
loan with reasonable rates and terms, which is the relevant test for 
``credit not available elsewhere.''

Business and Industry (Sec.  5001.103)

    Comment: One commenter suggested combining the cooperative stock 
requirements into one section, rather than mixing them in with general 
requirements in several sections.
    Response: The Agency appreciates the commenter's suggestion, but 
has not revised the rule as suggested. Instead, the Agency will provide 
a section specific to requirements for cooperative stocks in the 
handbook for the rule.

Project Eligibility (Sec.  5001.103(b)) (Proposed Sec.  5001.103(a))

    Comment: Two commenters noted that the proposed rule does not 
address the eligibility of mixed use commercial buildings projects, 
which consist of a combination of commercial and residential use. One 
of the commenters stated that such projects should be expressly 
authorized given their importance in rural development.
    Response: The Agency currently provides guaranteed loans under the 
Business and Industry program to such mixed-use projects and agrees 
that such projects should be eligible. Therefore, the Agency has 
specifically included in the rule a provision identifying such projects 
as being eligible, provided the residential real estate portion is not 
included in the loan (see Sec.  5001.103(b)(xviii)).
    Comment: Two commenters noted that currently Business and Industry 
assistance cannot be used to guarantee letters of credit and suggested 
that a Business and Industry guarantee for Industrial Development Bonds 
could be a useful tool and should be expressly permitted.
    Response: Under the proposed rule, Industrial Development (ID) 
Bonds were not precluded, either by statute or by the rule, from the 
Agency guaranteeing such bonds. However, there may be tax implications 
affecting the tax free status of an ID bond when it is part of a loan 
guaranteed by the Agency. Regardless, the Agency does not believe it is 
necessary to add a specific provision to the rule addressing ID bonds.
    Comment: Two commenters noted that the proposed rule no longer 
states that agricultural production guaranteed loans will be limited to 
the lesser of $1 million or 50% of the guaranteed loan when a value-
added enterprise is associated with it. One commenter stated that many 
would argue that there is a need for guarantees on larger agricultural 
enterprises. The other commenter asked why this is being expanded.
    Another commenter said that the proposed rule sets up a confusing 
new standard for agricultural operations, where the proposed rule would 
vaguely allow loans for ``agricultural production, with advance written 
approval from the Agency.'' This commenter asked what the criteria 
would be for the Agency to provide such advance written approval, and 
recommended retaining the current workable Business and Industry rules 
(Sec.  4279.113(h)).
    Response: The Agency agrees with the commenters' observation that 
the rule would no longer impose a limit on guaranteed loans for 
agricultural production, thereby expanding the number of agricultural 
operations for which loans could be guaranteed. Instead of imposing the 
current regulations' monetary requirements for determining whether an 
agricultural project would be eligible, the Agency elected a more 
flexible approach of requiring prior written approval from the Agency. 
The criteria that the Agency will use in determining whether to issue 
that approval or not will be provided in the handbook to the rule.
    Comment: Two commenters recommended eliminating refinancing as an 
eligible purpose. One commenter offered examples of the types of 
obligations that are often refinanced under the current regulations and 
stated that the proposed regulation would eliminate a substantial 
portion of the transactions currently undertaken in the Business and 
Industry program. It would shift the program to focus more on startup 
companies which would create direct competition with the SBA. In 
addition, the proposed regulations would have a discouraging effect on 
lenders, further reducing the number who are willing to deal with many 
of the issues that currently exist in the program(s). Examples 
included: Leases or other debt instruments that are often very 
expensive and onerous, Bank loans that are often ``over 
collateralized'' or improperly collateralized and have tied the 
borrowers' hands for expansion or recapitalization, Bank loans that are 
``maxed out'' due to lending limitations of the local lender(s) which 
are preventing the borrower from growing, banking relationships which 
have become restrictive to the borrower and are preventing the company 
from growing due to an ``honest'' disagreement over risk, and planning 
for the sale of the business through an orderly transition of the 
business and assumption of the debt over a scheduled period of time.
    One commenter noted that providing the lender with a guarantee on 
other existing lender debt has been a highly desired loan purpose under 
the program. It is a good marketing tool for the program and has been 
the primary loan purpose for the commenter's involvement with existing 
businesses.
    One commenter also stated that a definition of ``refinance'' would 
be helpful in responding to this proposed regulation.
    Response: The Agency has revised this provision to more closely 
follow the provision in the existing regulations and has restricted the 
proposed minority portion requirement to same lender debt refinancing 
(see response to the following comment).
    Comment: Nine commenters expressed concern regarding the 
requirement limiting refinancing to 50% or less of the loan funds. One 
commenter noted that refinancing is a large part of the program, and as 
long as the refinancing helps the cash flow of the company and keeps 
the company profitable, it should be eligible.
    One commenter stated that, if this requirement stands, it would 
eliminate this lender's ability to offer a valuable service that the 
lender has found to be a successful use of this program. This commenter 
requested that some qualifying language be added to allow loans such as 
monies for remodeling and refurbishment and for removal of looming 
balloon payments, to continue to be possible. Two commenters said that 
limiting refinancing of any debt to a minority portion of the loan will 
adversely affect many businesses attempting to restructure debt that 
was inappropriate to begin with. These commenters added that the 
commercial loan aspect of the Business and Industry Guarantee should 
not put unnecessary restrictions that can be better served with proper 
credit underwriting by the Agency.
    One commenter stated that if refinancing of other loans would be 
limited to a minority portion of the guaranteed loan, debt refinancing 
that provides an improvement in cash flow or that allows a lender to 
obtain a needed lien position when financing a

[[Page 76764]]

new project would disrupt the business/banking relationship of the 
borrower and lender. One commenter said that limiting refinancing to 
less than 50% of the total project could disqualify some important 
transactions and that refinancing is frequently an integral part of a 
company's overall financial planning. Imposing this rule would remove a 
great deal of flexibility from the program, thereby diminishing its 
desirability for lenders and borrowers alike.
    One commenter recommended continuing with the existing program and 
not limiting refinancing to 50% of loan funds, as this new arbitrary 
limit does not fit the real world of business and finance. The existing 
program is beneficial to businesses looking to expand and gives the 
lenders the ability to properly structure and secure debt for 
companies. Another commenter noted that current regulations allow the 
Agency to support projects to improve the cash flow and viability of 
some borrowers, enabling them to grow and provide benefit to their 
communities. Limiting this opportunity does not reduce Agency risk, but 
does reduce the program's potential effectiveness. One commenter stated 
that this proposed regulation limiting the refinancing should not even 
exist, as it limits a company's ability to refinance existing debts 
over better terms.
    Response: The Agency agrees with the commenters that the 50% limit 
would unnecessarily limit refinancing as an eligible purpose. 
Therefore, the Agency has eliminated this provision with the exception 
for same lender debt refinancing. In the rule, same lender debt 
refinancing must be less than 50% of the new loan amount unless the 
amount of loan to be refinanced is already Federally guaranteed. If the 
amount of the loan to be refinanced is Federally guaranteed, then the 
50% requirement does not apply.
    Comment: Fourteen commenters recommended continuing with the 
current policy for refinancing.
    One commenter noted the change from the old regulations and simply 
recommended using the policy in the old regulation. Three commenters 
said that USDA should continue with its current policy and delete the 
proposed change. According to these commenters, the proposed change 
will adversely impact many other good credit worthy rural businesses 
that need to refinance existing loans to improve cash flow to make 
their rural business more viable or that need to refinance loans that 
are ballooning with a loan that makes their rural business more viable.
    Another commenter stated that current policy should be continued 
and that refinancing debt obtained during business startup is less 
risky and is often necessary to improve cash flow and allow a lender to 
obtain a senior lien position.
    One commenter requested that the existing rule be retained and 
stated that rural America does not need to have more restrictions 
placed on it for financing. One commenter stated that this is the 
single-most detrimental provision to the Business and Industry program 
in the proposed rule. This commenter recommended continuing with the 
current Business and Industry regulations, and said that the proposed 
change is arbitrary and unhelpful.
    One commenter stated the this change would severely impact the 
volume of loans that would be guaranteed by the Business and Industry 
program and said that current Business and Industry regulations 
permitting debt refinancing should be continued. According to this 
commenter, the ability to refinance debt is crucial when providing 
financial assistance to business, and this is one of the selling points 
of the Business and Industry programs. The commenter also noted that 
refinancing usually always strengthens a credit.
    One commenter recommended retaining the current language and noted 
that limiting refinancing will eliminate a major draw for the Business 
and Industry program. To take this away, according to the commenter, 
will greatly reduce the demand for the Business and Industry guarantee 
program and remove a great tool from the lenders involved with the 
program. Two commenters recommended keeping the existing rules for 
refinancing in place or lose lenders.
    One commenter stated that this section is confusing with regard to 
financing debt. The commenter pointed out that the proposed rule states 
that refinancing is an eligible use, but then specifies that any 
refinancing, except for Agency Direct loans, must be a minority portion 
of the loan. According to the commenter, this change would be 
detrimental to the Business and Industry program, as many loans are for 
refinancing. This commenter sees no reason to change the program from 
its current intent.
    One commenter recommended making no changes to the old rule for 
refinancing. The commenter noted that by refinancing to a fixed rate 
product, borrowers are better served and provide a more sustained 
outlook for job retention and possibly job creation. Therefore, 
according to the commenter, a refinance into a fixed interest rate is a 
method for business owners to predict their expenses and make sound 
decisions for growth.
    After referring to what the current program allows, one commenter 
suggested that the Agency expand this section to allow refinancing of 
existing Agency debt; excluding Agency direct loans, as long as the 
loan has been current for 12 months with no extensions, loan rewrites 
or debt forgiveness by the lender and the Agency. The commenter stated 
that lender debt should be allowed to be refinanced so long as the 
lender debt is less than 50% of Agency debt, excluding the unguaranteed 
portion of the guaranteed loan.
    Response: As noted in the previous response, the Agency has revised 
the provision for refinancing in the rule. The rule incorporates 
essentially the same provisions found in the current regulations.
    Comment: Two commenters addressed the issue of flexibility and 
refinancing. One commenter stated that the restriction should be 
relaxed since it prevents lenders who have not previously used the 
Business and Industry program from offering the benefits of the 
Business and Industry guarantee to its current portfolio of business 
borrowers. This commenter recommended allowing any and all Business and 
Industry guaranteed debt refinancing of loans already in a lender's 
portfolio, as long as they meet the following four criteria:
    (a) There will be at least a 20% reduction in debt service cost on 
the debt after the refinance,
    (b) The portfolio debt being refinanced has been in the lender's 
portfolio for at least 12 months,
    (c) The portfolio debt being refinanced has been current (not due 
to deferral or other restructuring) for at least the past 12 months, 
and
    (d) The portfolio debt being refinanced is classified at a level 
better than ``Doubtful''.
    The other commenter stated that the proposed rule would severely 
limit Business and Industry debt refinancing, and said that more 
flexibility regarding debt refinancing would be beneficial to the 
borrower and is important to ensure the effectiveness of this program.
    Response: As noted in previous responses, the Agency has revised 
this provision in the rule. In the rule, refinancing is allowed when 
the Agency determines that ``the project is viable and equal or better 
rates or terms are offered.'' The Agency believes that the revised 
provision allows the Agency flexibility in assessing each individual 
refinancing and to consider the risk for each proposed refinancing and 
that it is

[[Page 76765]]

unnecessary to incorporate the prescriptive conditions suggested by the 
commenter.
    Comment: One commenter recommended allowing refinancing of the 
entire debt with another lender to be an eligible purpose and stated 
that this paragraph may not allow this. The commenter then requested 
clarification.
    Response: The revised provision on refinancing in the rule allows 
the refinancing of any loan under certain conditions, except that same 
lender debt refinancing is limited to 50% unless the amount of the loan 
to be refinanced is already Federally guaranteed. The rule allows the 
refinancing of the entire debt with another lender provided the project 
is viable and equal or better terms are offered. The Agency does not 
believe it is necessary or appropriate to include this specific type of 
refinancing in the rule.
    Comment: One commenter noted that the proposed provision for fees 
and packagers as an eligible purpose seems to contradict Sec.  
5001.7(h) and suggested that packager or broker fees may be considered 
``professional services.''
    Response: The Agency understands why the commenter thinks that 
allowing professional service fees appears to contradict the general 
prohibition in subpart A for packager and broker fees. Subpart A 
identifies packager fees and broker fees as ineligible, while subpart B 
further provides for what is eligible; in this case, professional 
service fees are eligible. Thus, the proper reading of the rule is that 
professional service fees are eligible, except for packager and broker 
fees. The Agency has revised subpart B to indicate clearly that where 
professional service fees are eligible costs, they do not include 
packager or broker fees.
    Comment: One commenter identified a contradiction between proposed 
Sec.  5001.103(a)(1)(xiii), which allows loans to tourist and 
recreational businesses, and Sec.  5001.7 which prohibits loans to golf 
courses, racetracks, water parks, ski slopes, and similar recreational 
facilities, and recommended that this contradiction should be 
clarified.
    Response: In response to another comment, the Agency has limited 
the specific paragraph reference in Sec.  5001.7 to racetracks and 
other similar recreational facilities. Nevertheless, as noted in the 
previous response, subpart B lists those projects that are eligible for 
a Business and Industry guaranteed loan, while the recreational 
projects listed in subpart A will never be eligible for a Business and 
Industry guaranteed loan. If a recreational project is not listed in 
subpart A, then it would be eligible under subpart B for a Business and 
Industry guaranteed loan.
    Comment: Two commenters asked for clarification as to what the 
``certain restrictions'' are for housing development sites.
    Response: The Agency will provide guidance on the restrictions in 
the handbook for the rule. In the rule, the Agency has rephrased this 
to read ``with Agency-approved restrictions.''
    Comment: One commenter asked why the provisions in the 2002 Farm 
Bill for loan guarantees to cooperative organizations that were 
headquartered in an urban area as long as certain rural benefits/
requirements were met, were omitted from the proposed rule.
    Another commenter asked what ``assisting cooperative 
organizations'' means.
    This commenter also asked whether housing cooperatives would be 
eligible and suggested that because cooperatives are already listed as 
an eligible entity for Business and Industry loans, this item could be 
eliminated here as redundant.
    Response: The Agency agrees that loan guarantees to cooperative 
organizations that were headquartered in an urban area are eligible as 
long as certain rural benefits/requirements were met need to be part of 
the rule, and has added this provision to Sec.  5001.103(d)(1)(v) 
concerning borrower eligibility. The Agency also agrees that the word 
``assisting'' in proposed paragraph (d)(1)(xviii), as well as in 
paragraph (xvii), made those two paragraphs unclear in their meaning. 
The Agency also determined that it is not needed in either paragraph 
and thus has removed it from these two paragraphs in the rule. Finally, 
the Agency deleted proposed Sec.  5001.103(xviii) in its entirety 
because cooperative organizations are eligible entities and it was 
redundant to identify cooperative organizations as an eligible purpose.

Unauthorized Projects and Purpose (Sec.  5001.103(c)) (Proposed Sec.  
5001.103(b))

    Comment: One commenter stated that the proposed rule does not say 
anything about the eligibility of projects that 7 CFR part 4279, 
subpart B currently prohibits (charities, churches, fraternal 
organizations per 7 CFR Sec.  4279.114(d) and lending, investment, and 
insurance companies per 7 CFR 4279.114(e). This commenter recommended 
that it would be best to continue with established Business and 
Industry practices in the new rule.
    Another commenter stated that currently the Business and Industry 
program prohibits loan guarantees to insurance companies, lending 
institutions, charitable institutions, and businesses owned by 
Government employees, but that under the proposal these are no longer 
listed as ineligible. The commenter questioned why this was changed and 
stated that guaranteeing loans to insurance companies to pay claims or 
to lending institutions to make loans is extremely risky. The commenter 
further explained that if these type businesses cannot generate 
sufficient cash flow and have to resort to borrowing, it is an 
indication of an unsuccessful business.
    Response: The Agency agrees with the commenters that the rule 
should have incorporated the current Business and Industry regulations 
pertaining to the ineligibility of lender, investment, and insurance 
companies. The rule includes these as ineligible purposes. However, it 
is not the intent of the Agency, as a policy matter, to preclude the 
eligibility of certain projects associated with charities, churches, 
and fraternal organizations. The Agency will provide guidance in the 
handbook for the rule concerning such projects.
    Comment: One commenter did not believe that the intent of this rule 
was to prohibit financing of small businesses doing business from the 
owner's home, and suggested returning to the language in the old 
Business and Industry regulations. The commenter suggested using the 
following: ``Owner-occupied housing. Bed and breakfasts, storage 
facilities, et al., are eligible when the pro-rata value of the owner's 
living quarters is deleted from the value of the project.'' Another 
commenter stated that the proposed rule does not say anything about the 
eligibility of projects that RD Instruction 4279-B currently prohibits, 
including owner-occupied housing per Sec.  4279.114(n)). This commenter 
recommended that it would be best to continue with established Business 
and Industry practices in the new rule.
    Response: The Agency believes the provisions in both Sec.  
5001.103(b)(2)(xiii) and in Sec.  5001.103(c)(1) adequately address 
owner-occupied housing, including bed and breakfast establishments, 
sufficiently to determine whether owner-occupied housing is eligible or 
not. The provision in Sec.  5001.103(c)(1) is sufficiently broad to 
cover owner-occupied housing. The Agency will provide additional 
guidance in the handbook for the rule concerning businesses housed in 
private homes.
    Comment: One commenter noted that the need to have the Department 
of Labor give its approval for any project that will be creating more 
than 50 jobs should be changed, because adding another layer of 
approval does not make

[[Page 76766]]

any sense and takes too much time. The commenter stated that this 
requirement needs to be changed and has no value to the whole system.
    Response: The requirement referred to by the commenter is a 
statutory requirement and as such the Agency cannot change it within 
this rulemaking. However, the Agency has recast this provision to 
reference the statutory provisions as follows: Any project that does 
not meet the requirements of paragraphs (d)(2), (d)(3), and (d)(4) in 7 
CFR part 1932.
    Comment: One commenter suggested that with regard to interim 
financing the rule should be amended to allow for partial pre-
applications or simple notifications of intent to use the program in 
cases where the borrower is unable to provide all of the information 
necessary to complete a pre-application.
    Response: The Agency has not implemented the commenter's 
suggestions because interim financing is not an eligible purpose and, 
thus, there are no applicable pre-application or notification 
requirements.
    Comment: One commenter stated that this provision as written would 
prohibit inter-family transfers of business ownership and needs to be 
fixed. A second commenter recommended replacing the term ``immediate 
family'' with ``close relative'' to use (and be consistent with) a 
definition established in Sec.  5001.2. This commenter also noted that 
the term ``close relative'' is not defined.
    Response: The Agency agrees with both suggestions. This provision 
in the rule now uses the term ``immediate family'' and specifically 
provides an exemption that allows for the inter-family transfer of 
business ownership.
    Comment: One commenter noted that this rule does not define what 
``Government Employees'' consist of in relationship to assistance to 
government employees. The commenter recommended that ``Government 
Employees'' should be qualified to mean any federal employee of the 
United States Federal Government. If the proposed regulation is not 
clarified, it would be unfair as some U.S. government employees would 
be eligible for guaranteed funding while others would not.
    Response: Subpart A prohibits projects and purposes where there are 
conflicts of interest or appearances of conflicts of interest. The 
Agency believes that this subpart A provision is sufficient such that 
proposed Sec.  5001.103(b)(6) is not required and this paragraph has 
been removed from the rule. With its removal, there is no need to 
define, within the rule, ``government employee.''

Borrower Eligibility (Sec.  5001.103(d)) (Proposed Sec.  5001.103(c))

    Comment: One commenter noted that eligible borrowers for Business 
and Industry loans will now include virtually any legally-organized 
entity, including purely charitable, fraternal and religious 
organizations, which is a difference from the existing regulations.
    Response: The Agency agrees with the commenter's observation.
    Comment: One commenter noted that true cooperatives are omitted as 
eligible borrowers.
    Response: The Agency agrees that the proposed rule did not include 
true cooperatives as eligible borrowers. This was an oversight and the 
rule now includes true cooperatives as eligible borrowers. To effect 
this change, the Agency redefined cooperative organization.

Additional Application Process Requirements (Sec.  5001.103(f)) 
(Proposed Sec.  5001.103(d))

    Comment: Three commenters commented on the proposed priority 
scoring of Business and Industry applications. Two of the commenters 
stated that it makes no sense to require the Agency to publish its 
priority scoring process every year in the Federal Register. These 
commenters suggested reprinting the current scoring criteria from the 7 
CFR part 4279, subpart B regulation.
    The third commenter said that priority scoring should be 
eliminated, noting that commercial lending is a just-in-time business 
and the use of a priority scoring system ever in the delivery of loan 
guarantees is anathema. According to this commenter, the guarantees 
must be available on a first-come-first-served basis until funding is 
exhausted.
    Response: In considering these comments, the Agency believes that 
the suggestion to eliminate priority scoring for guaranteed loan 
programs is appropriate in order to deliver the programs in line with 
commercial lending practices. Therefore, the Agency has revised the 
rule to eliminate references to scoring and has replaced scoring with a 
``first in, first out'' basis; that is, the Agency will approve loan 
applications based on the date and time complete applications are 
received by the Agency. In determining the date and time for receipt of 
complete applications, the Agency will convert the date and time to 
Eastern time.

Additional Application Documentation Provisions (Sec.  5001.103(g)) 
(Proposed Sec.  5001.103(e))

    Comment: Six commenters expressed a variety of concerns on the 
proposed requirement for audited financial statements.
    One commenter recommended that USDA continue its current Business 
and Industry guaranteed loan regulation regarding audited financial 
statements. The proposed regulation is unclear; however, if the 
intention is to require applicants for loans over $1 million to have 
audited financial statements for prior years, it will adversely impact 
many otherwise good, credit worthy potential rural businesses that need 
Business and Industry guaranteed loans.
    Two commenters suggested deleting this requirement altogether. One 
commenter stated that this requirement is inappropriate for Business 
and Industry and should be eliminated. The commenter stated that:
    (1) no allowance is made for startup businesses where there would 
be no audit available;
    (2) if only annual audits are needed for risky projects over $3 
million, so why are audits needed up front for a sound borrower and a 
$1 million project; and
    (3) audits are expensive and burdensome and would be a significant 
hindrance to the Agency's ability to support many of its current 
borrowers. The other commenter questioned at whose discretion the audit 
would be required, the Agency or the loan officer. This commenter added 
that audited statements are a true financial hardship for the majority 
of borrowers and should be eliminated completely from the proposal 
requirements. This commenter also noted that the requirement for 
audited financial statements is not an industry norm.
    Two commenters suggested using tax returns instead of audited 
financial statements. One commenter noted that the USDA needs to use 
the opportunity of this proposed rule to jettison its focus on GAAP 
financial statements in favor of tax returns, the financial tool now 
most widely used in business banking and the only financial statement 
that is uniformly and consistently available from all businesses. The 
other commenter stated that audited statements are expensive and not 
practical for many rural businesses, and suggested using tax returns, 
as it is more common and effective.
    Another commenter noted that this seems to conflict with Sec.  
5001.12, and asked if they don't need an audit after they receive the 
loan, why require it

[[Page 76767]]

before they even apply. This commenter believed that the paragraph in 
this section is correct, and stated that an audit requirement should be 
up to the lender first and USDA should have the option to require one 
on the larger loans about $3 million.
    Response: As noted in responses to other related comments, the 
Agency has removed the requirement for annual audited statements for 
projects over $3 million and has replaced it with a requirement for the 
submittal of financial reports, either as required by the lender's 
regulatory authority if the lender is regulated or supervised or as 
contained in the Conditional Commitment if the lender is an other 
lender (see Sec.  5001.17(d), Financial reports).
    In addition, provisions in the rule address the commenter's concern 
for startup businesses by allowing borrowers that have been in 
existence for less than one year to submit an Agency-authorized 
financial statement, which may be an unaudited statement, with the 
application.
    Comment: Three commenters stated that the requirement for annual 
audited financial statements is a loan servicing requirement, not an 
application requirement, and suggested that it be part of either the 
Loan Agreement requirements or Conditional Commitment section.
    Response: The Agency agrees with the commenters that the 
requirement for annual financial statements is not an application 
requirement. In the rule, the Agency is requiring the submittal of 
financial reports as part of lender servicing requirements under 
subpart A (see Sec.  5001.17(d)).

Additional Guarantee- and Loan-Related Requirements (Sec.  5001.103(j)) 
(Proposed Sec.  5001.103(g))

    Comment: One commenter recommended that the current practice in 7 
CFR 4279.181, of having the lender provide a certification that all of 
the requisite conditions are met prior to issuance of the guarantee 
should be incorporated here.
    Response: The rule provides in Sec.  5001.34(c) that the Agency 
will not issue the Loan Note Guarantee until all of the conditions 
specified in the Conditional Commitment have been met. This provision 
applies to all of the guaranteed loan programs covered by this rule. 
Thus, there is no need to repeat this requirement in subpart B for the 
Business and Industry program.
    Comment: Four commenters provided comments on funding limits. Two 
commenters noted that the proposed rule has no change in the Business 
and Industry maximum funding limit and recommended increasing the 
maximum loan limit for Business and Industry loans to $40 million due 
to the capital needed in all types of businesses, not just 
cooperatives.
    One commenter recommended that limits be established for the total 
borrower indebtedness and for total indebtedness of the owners, 
guarantors, related businesses, or parties. This commenter suggested 
the following language: ``Funding limits. The total amount of Business 
and Industry (Business and Industry) loans to any one borrower, 
including:
    (1) the guaranteed and unguaranteed portions,
    (2) the outstanding principle and interest balance on any existing 
Business and Industry loans, and
    (3) new Business and Industry loan requests, must not exceed $25 
million except that the total Business and Industry amount to a 
cooperative organization may not exceed $40,000,000 for rural projects 
processing value added commodities.''
    Response: It is the Agency's intent to continue the current 
Business and Industry program's funding limitations and the Agency has 
not revised the maximum loan limit in the rule. If the Agency 
determines at a future date that such an increase is warranted, the 
Agency would consider revising the rule at such time.
    With regard to the suggestion that the Agency limit the amount of 
Business and Industry guaranteed loans to one borrower, the Agency has 
incorporated a provision that would limit the amount a borrower could 
receive. Specifically, as stated in 5001.103(j)(5), ``the full amount 
of outstanding principal and interest balance associated with Business 
and Industry loans, including the amount of the loan being approved, 
cannot exceed $25,000,000 for any one borrower.'' For a cooperative 
organization, this limit is $40,000,000.
    Lastly, the commenter also suggested that an upper limit be based 
on the amount of indebtedness that a borrower has to the Agency (``The 
total amount of Business and Industry (Business and Industry) loans to 
any one borrower''). The Agency disagrees that, if an upper limit were 
to be adopted, such an upper limit would be based only on the 
borrower's indebtedness to the Agency. There is no rational basis to 
differentiate between a borrower's indebtedness to the Agency and the 
borrower's total indebtedness.
    Comment: One commenter stated that the 1% guarantee fee is 
available if the borrower is a high impact business, which is currently 
determined by using the Priority Scoresheet that the State Office 
prepares for each loan. The commenter then asked how this will be 
determined because the proposed rule eliminated the Priority 
Scoresheet.
    One commenter recommended that the 2% fee needs to be reduced to 1% 
and the annual servicing fee needs to be reduced to 0.125%.
    Response: The Agency will determine if a business is a ``high 
impact'' business on the basis of whether it meets the definition of 
``high impact business,'' which has been rewritten to make it clearer 
when a business is a high impact business. The Agency will provide 
additional guidance in the handbook for the rule to assist in making 
such determinations. The Agency does not see any need to reduce the 
guarantee fee further than provided for in the rule for high impact 
businesses. The rule does not specify a maximum annual servicing fee 
and the Agency will publish the applicable rate when such a fee will be 
assessed in a fiscal year.
    Comment: Two commenters stated that the percentage of guarantee 
should be a constant at 80% on Business and Industry loans, and not 
decreased as the loan size increases. The commenters added that this 
would make the Business and Industry program more attractive to lenders 
and better enable the small and medium banks to handle and serve their 
customers.
    A third commenter stated that the 60% guarantee amount and 
$25,000,000 loan amount limit the usefulness of the guarantee on larger 
projects. This low of a guarantee is very difficult to sell in the 
marketplace.
    Response: The Agency has not revised the rule as requested by the 
commenters. The provisions on the level of the guarantee are based on 
the Agency's strategy for managing risk and the Agency believes that 
the percentage of guarantees as proposed are reasonable.
    Comment: One commenter stated that the asterisk to the chart should 
read ``Per Sec.  5001.103(g)(3), the maximum * * * is $25 million 
except for a rural cooperative organization producing a value added 
commodity for which the maximum is $40 million.'' See 2002 Farm Bill.
    Response: While the commenter is correct, the Agency has removed 
the table from the rule and thus there is no correction to make.

Rural Energy for America Program (Sec.  5001.104)

Application Documentation (Sec.  5001.104(d))

    Comment: Two commenters stated that the certification should be 
corrected

[[Page 76768]]

to specify that the prospective borrower is an agricultural producer 
(not a ``small'' agricultural producer) or rural small business. The 
commenters pointed out that there is no limitation in the 9006 program 
to assisting only ``small agricultural producers'', and this should not 
be imposed now. According to the commenters, to limit the 9006 
guaranteed loans to producers grossing $600,000 or less would restrict 
the program only to the smallest of farmers.
    Response: The Agency did not intend to change this certification 
from what the current program requires and thus agrees with the 
commenters. Therefore, the Agency has revised the rule to drop 
``small'' in reference to agricultural producer. A conforming change 
was also made to the definitions section by dropping the term ``small 
agricultural producer'' as that term no longer appears in the rule.
    Comment: Three commenters expressed concern as to who would review 
technical reports for renewable energy projects. One commenter 
suggested requiring the technical report to flow through USDA for 
submission to DOE. Another commenter also preferred to be able to 
coordinate this activity through the USDA as part of the USDA program. 
One commenter asked if the proposed process is actually possible and if 
the National Renewable Energy Laboratory (NREL) is agreeable. This 
commenter suggested requiring a technical report as part of any 
application for any loan over a certain size, and leave it up to USDA 
to arrange for the technical review.
    Response: The Agency agrees that it should be responsible for 
ensuring that these technical reports are reviewed by the appropriate 
entity and has modified the rule to indicate that these reports are to 
be submitted to the DOE for review unless otherwise stated in a Federal 
Register notice. Beyond that, the Agency will provide guidance in the 
handbook to the rule to ensure the proper entities are engaged in 
reviewing the technical report.
    Comment: One commenter suggested that the technical report 
threshold of a ``loan guarantee of more than $200,000'' should be 
changed from ``loan guarantee'' to either eligible project costs or the 
total loan amount, regardless of the percent of guarantee. According to 
the commenter, tying the $200,000 to the amount of the loan guarantee 
is confusing and is not a measure commonly used by USDA anywhere else 
and would surely cause problems.
    Another commenter also suggested that this requirement be tied to 
total project cost rather than the size of the guaranteed loan. This 
commenter further suggested that the threshold be lowered to $50,000 
because renewable energy projects are complex, even when they are 
small, since they rely on such factors as interconnection, resource 
availability, technology, etc.
    Response: The Agency agrees with the two commenters that the 
criterion to determine when the technical report is required should be 
based on total eligible project costs and not on the loan guarantee 
amount. The Agency has made this change in the rule. However, the 
Agency disagrees that the threshold needs to be reduced and has 
retained the threshold at $200,000.
    Comment: One commenter recommends that energy assessments/audits 
should only be required on energy efficiency projects costing in excess 
of $100,000.
    Response: The Agency disagrees that the threshold for requiring an 
energy assessment or audit needs to be changed from the current level 
of $50,000, and has retained this threshold in the rule to ensure that 
loans of more than $50,000 are having an impact on energy savings.
    Comment: One commenter noted that, unlike with renewable energy 
projects discussed in Sec.  5001.104(d)(2), there is no mention of any 
NREL or other technical review for energy assessment and audits in 
Sec.  5001.104(d)(3). The commenter asked what is intended, and said 
that this should be spelled out.
    Response: As noted in the response to a similar comment on the 
technical reports required under this program, the Agency will ensure 
that the proper review of energy assessment and energy audits performed 
will take place, but that it is not necessary to identify in the rule 
who will perform such reviews.
    Comment: One commenter noted that the limit for energy assessment/
audit refers to eligible project costs greater than $50,000, compared 
to seeking a loan guarantee of $200,000 for the renewable energy 
technical report or the feasibility study required under Sec.  
5001.104(d)(4). The commenter recommended consistency, stating that the 
different amounts are confusing, and using different measures will be 
problematic.
    Response: The Agency agrees, in part, with the commenter that the 
same measure for determining when an energy assessment or audit is 
required should be used for when a technical report is required. Thus, 
the Agency has modified the rule such that in both instances total 
eligible project costs is the measure. However, for determining when a 
feasibility study is required, the Agency is maintaining the proposed 
measure of the size of the loan guarantee because it is a better 
measure of risk than total eligible project costs and the Agency has 
direct control over the loan guarantee amount and not the project cost. 
The Agency believes that these requirements are clear enough that 
confusion will not be an issue.
    Comment: One commenter suggested that the regulation simply require 
a feasibility study and that it may be appropriate for the applicant to 
obtain the study. The commenter noted that this would be more 
consistent with the language used for the Business and Industry 
program. The commenter suggested the following language be used: 
``Feasibility study. A feasibility study by a qualified independent 
consultant is required for each project seeking a loan guarantee 
greater than $200,000.''
    Response: The Agency agrees with the commenter that the text of 
this paragraph should simply state that a feasibility study is required 
and not to refer to the lender obtaining the study. The rule reflects 
the language suggested by the commenter. The Agency has not included in 
the rule who is responsible for obtaining the feasibility study as this 
is unnecessary.
    Comment: One commenter noted that the requirement for a feasibility 
study does not currently apply to energy efficiency projects under 
section 9006 guarantees, and recommended that this exception should not 
be revoked as is proposed here.
    Response: The Agency agrees with the commenter. It was not the 
intent in the proposed rule to require feasibility studies for energy 
efficiency projects and the rule has been modified to require 
feasibility studies only for renewable energy systems, as is found in 
the current regulations for this program.
    Comment: One commenter questioned whether it is necessary to have a 
feasibility study on proven, ``cookie-cutter'' projects such as large 
wind, even if they cost more than $200,000.
    Response: The Agency disagrees with the commenter's suggestion. The 
Agency believes that all renewable energy projects with guaranteed loan 
amounts of greater than $200,000 require a feasibility study because 
even ``cookie-cutter'' projects can have project- and site-specific 
issues.
    Comment: Regarding the language that says that the Agency ``may'' 
require a feasibility study, one commenter suggested that guidance 
should be provided that explains when a feasibility study is necessary 
(e.g., in a staff instruction or handbook).
    Response: The Agency reviewed the proposed rule and, as proposed,

[[Page 76769]]

feasibility studies for projects under this program would be required; 
the proposed rule did not say that the Agency ``may require'' a 
feasibility study. Thus, no change is required to the rule in response 
to this comment. The Agency notes that the Agency ``may require'' 
feasibility studies for other programs and has addressed this same 
comment elsewhere.
    Comment: One commenter noted that the proposed rule is silent on 
the annual financial statements requirement for Section 9006 borrowers, 
but then there is a reference to audited financial statements on loans 
over $3 million. The commenter stated that USDA needs to use the 
opportunity of this proposed rule to jettison any focus on GAAP 
financial statements in favor of tax returns, the financial tool now 
most widely used in business banking and the only financial statement 
that is uniformly and consistently available from all agricultural 
producers and small businesses.
    Response: The financial statement requirements applicable to all 
programs under this part, including the Rural Energy for America 
Program, are found in subpart A in Sec.  5001.12(a)(10). Under the 
rule, Agency-authorized financial statements may be used for businesses 
that have been in existence for less than one year regardless of the 
amount of the guaranteed loan request. If the guaranteed loan is for 
less than $3 million, borrowers that have been in existence for one or 
more years may submit either the most recent audited or Agency-
acceptable financial statements of the borrower. Thus, for these set of 
borrowers, the rule allows for flexibility in the type of statement 
submitted. However, the Agency continues to believe that requiring 
audited financial statements is the best method for addressing risk for 
borrowers that have been in existence for one or more years that are 
seeking guaranteed loans of $3 million or more, unless alternative 
financial statements are authorized by the Agency.

Additional Guarantee- and Loan-Related Requirements (Sec.  5001.104(g)) 
(Proposed Sec.  5001.104(f))

    Comment: Two commenters noted that the proposed rule disallows 
issuance of the guarantee until after the Section 9006 project is 
complete and operating up to specifications. The commenters pointed out 
that the current regulations are vague as to what constitutes an 
operating cycle, and this requirement is too conservative to promote 
the Section 9006 program's goal of encouraging new projects. The 
commenters suggested allowing the issuance of the guarantee prior to 
development for all energy-efficiency projects and for renewable energy 
projects using commercially available, as opposed to pre-commercial 
technology. The commenters added that this will allow additional 
project opportunities as the construction phase is typically the 
highest risk period to the lender and the guarantee will help mitigate 
this risk and promote quality projects.
    Response: The Agency disagrees with the commenters' suggestion to 
allow the issuance of the guarantee for projects under this program 
prior to completion because of the risk associated with the 
technologies associated with renewable energy projects. The rule 
continues current Agency policy with regards to projects under this 
program. With regard to current regulations being vague as to what 
constitutes an operating cycle, the Agency will provide guidance in the 
handbook to the rule.
    Comment: One commenter said that, to be a serious contender in the 
energy-financing field, the program must let lenders loan more than 50% 
of eligible project costs. The commenter recommended raising the limit 
to 75% combined total between energy grants and guaranteed loans to 
allow for a larger percentage loan if no grant is involved in the 
project.
    Response: The 2008 Farm Bill has raised this limit to 75%. 
Therefore, the Agency has revised the interim rule accordingly, raising 
the limit from 50% to 75%.
    Comment: One commenter noted that the proposed rule does not limit 
the size of individual energy loans or the total indebtedness of the 
borrower, owners, or related entities, and suggested that established 
limits be considered. Another commenter asked if there is a maximum 
loan size specified in this regulation.
    Response: The commenter is correct in that unlike the current 
regulation, which limits the amount of a loan to any one borrower to 
$10 million, the proposed rule did not include this limit. However, the 
2008 Farm Bill has a provision that limits the maximum loan guarantee 
under this program to $25 million. Therefore, the Agency has added this 
limit to the rule. In addition, the interim rule applies this limit on 
a per borrower basis, stating that ``at the time of loan approval, the 
full amount of outstanding principal and interest balance associated 
with Rural Energy for America Program loans, including the amount of 
the loan being approved, cannot exceed $25 million for any one 
borrower.''
    Comment: One commenter requested that the proposed rule clarify 
that customary lender fees associated with the loan and the section 
9006 guaranteed loan fee are eligible purposes.
    Response: It is the Agency's policy that each loan guarantee be 
attributed to hard project costs and not fees. Thus, no change was made 
to the rule in response to this comment.

List of Subjects

7 CFR Part 1779

    Guaranteed loans, Loan programs, Waste treatment and disposal, 
Water supply.

7 CFR Part 3575

    Community facilities, Guaranteed loans, Loan programs.

7 CFR Parts 4279 and 4280

    Loan programs--Business and industry--Rural development assistance, 
Economic development, Energy, Direct loan programs, Grant programs, 
Guaranteed loan programs, Renewable energy systems, Energy efficiency 
improvements, Rural areas.

7 CFR Part 5001

    Business and industry, Community facility, Energy efficiency 
improvement, Loan programs, Renewable energy, Rural development, Rural 
areas, Water and waste disposal.

0
For the reasons set forth in the preamble, under the authority at 5 
U.S.C. 301 and 7 U.S.C. 1989, Chapters XVII, XXXV, and XLII of title 7 
of the Code of Federal Regulations are amended and Chapter L is 
established as follows:

CHAPTER XVII--RURAL UTILITIES SERVICE, DEPARTMENT OF AGRICULTURE

PART 1779--[REMOVED]

0
1. Part 1779 is removed and reserved.

CHAPTER XXXV--RURAL HOUSING SERVICE, DEPARTMENT OF AGRICULTURE

PART 3575--[REMOVED]

0
2. Part 3575 is removed and reserved.

CHAPTER XLII--RURAL BUSINESS--COOPERATIVE SERVICE AND RURAL UTILITIES 
SERVICE, DEPARTMENT OF AGRICULTURE

PART 4279--GUARANTEED LOANMAKING

0
3. The authority citation for part 4279 is revised to read as follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 1989.

[[Page 76770]]

Subpart B--Business and Industry Loans

0
4. Subpart B of part 4279 is removed and reserved.

PART 4280--LOANS AND GRANTS

0
5. The authority citation for part 4280 continues to read as follows:

    Authority: 7 U.S.C. 8106.

Subpart B--Renewable Energy Systems and Energy Efficiency 
Improvements Program [Amended]


Sec. Sec.  4280.121-4280.160  [Removed and Reserved]

0
6. Section B of Subpart B of part 4280, consisting of Sec. Sec.  
4280.121 through 4280.160, is removed and reserved.

0
7. Section 4280.193 of subpart B of part 4280 is amended by revising 
the introductory text and paragraphs (a), (b)(1), (c) through (e), and 
(f)(2) to read as follows:


Sec.  4280.193  Combined funding.

    The requirements for a project for which an applicant is seeking a 
combined grant and guaranteed loan are defined as follows:
    (a) Eligibility. Applicants must meet the applicant eligibility 
requirements specified in Sec.  4280.107. Projects must meet the 
project eligibility requirements specified in Sec. Sec.  4280.108. 
Applicants may submit simplified applications if the project meets the 
requirements specified in Sec.  4280.109.
    (b) * * *
    (1) The amount of any combined grant and guaranteed loan must not 
exceed 75% of total eligible project costs. For purposes of combined 
funding requests, total eligible project costs are based on the total 
costs associated with those items specified in Sec. Sec.  4280.110(c) 
and 5001.104(g)(3) of this chapter. The applicant must provide the 
remaining total funds needed to complete the project.
* * * * *
    (c) Application and documentation. When applying for combined 
funding, the applicant must submit separate applications for both types 
of assistance (grant and guaranteed loan). Each application must meet 
the requirements, including the requisite forms and certifications, 
specified in Sec. Sec.  4280.111, 5001.12, and 5001.104(d) of this 
chapter. The separate applications must be submitted simultaneously. 
The applicant must submit at least one set of documentation, but does 
not need to submit duplicate forms or certifications.
    (d) Evaluation. The Agency will evaluate each application according 
to applicable procedures specified in Sec. Sec.  4280.112, 5001.11, and 
5001.104(c) of this chapter.
    (e) Interest rate and terms of loan. The interest rate and terms of 
the loan for the loan portion of the combined funding request will be 
determined based on the procedures specified in Sec.  5001.31 of this 
chapter for guaranteed loans.
    (f) * * *
    (2) All other provisions of 7 CFR part 5001 shall apply to the 
guaranteed loan portion of the combined funding request.

0
8. Chapter L consisting of parts 5000 through 5099 is established and a 
new part 5001 is added to read as follows:

CHAPTER L--RURAL BUSINESS--COOPERATIVE SERVICE, RURAL HOUSING SERVICE, 
AND RURAL UTILITIES SERVICE, DEPARTMENT OF AGRICULTURE

PART 5001--GUARANTEED LOANS

Subpart A--General Provisions
Sec.
5001.1 Purpose and scope.
5001.2 Definitions.
5001.3 Agency authorities.
5001.4 Oversight and monitoring.
5001.5 Forms, regulations, and instructions.

Basic Eligibility Provisions

5001.6 Project eligibility.
5001.7 Unauthorized projects and purposes.
5001.8 Borrower eligibility.
5001.9 Participation eligibility requirements.
5001.10 [Reserved]

Basic Guarantee Application Provisions

5001.11 Guarantee application process.
5001.12 Application for loan guarantee content.
5001.13-5001.14 [Reserved]

Basic Lender Provisions

5001.15 Lender responsibilities--General.
5001.16 Lender responsibilities--Origination.
5001.17 Lender responsibilities--Servicing.
5001.18--5001.24 [Reserved]

Basic Borrower Provisions

5001.25 Borrower responsibilities.
5001.26-5001.29 [Reserved]

Basic Guarantee and Loan Provisions

5001.30 General.
5001.31 Guaranteed loan requirements.
5001.32 Conditional commitment.
5001.33 Conditions precedent to issuance of loan note guarantee.
5001.34 Issuance of the guarantee.
5001.35 Alterations of loan instruments.
5001.36 Reorganizations.
5001.37 Sale or assignment of guaranteed loan.
5001.38 Termination of loan note guarantee.
5001.39-5001.100 [Reserved]
Subpart B--Program Specific Provisions
5001.101 Community Facilities Program.
5001.102 Water and Waste Disposal Facilities Program.
5001.103 Business and Industry Program.
5001.104 Rural Energy for America Program.
5001.105-5001.199 [Reserved]
5001.200 OMB control number.

    Authority: 5 U.S.C. 301; 7 U.S.C. 1926(a); 7 U.S.C. 1932(a); and 
7 U.S.C. 8106.


Sec.  5001.1  Purpose and scope.

    (a) General. The purpose and scope of this part is to simplify, 
standardize, and improve the making, guaranteeing, holding, servicing, 
and liquidating of Rural Development guaranteed loans. This part 
applies to those guaranteed loan programs specified in subpart B of 
this part.
    (b) Relationship between subpart A and subpart B requirements. All 
guaranteed loan programs subject to this part are subject to the 
requirements specified in subpart A, unless there is a program specific 
provision in subpart B that overrides the corresponding subpart A 
provision. Such as subpart B provision may modify the scope of or 
replace entirely the corresponding subpart A provision.


Sec.  5001.2  Definitions.

    The following definitions are applicable to the terms used in this 
part.
    Agency. The Rural Housing Service; the Rural Utilities Service; and 
the Rural Business-Cooperative Service or the successors for the 
programs it administers.
    Agricultural producer. An individual or entity directly engaged in 
the production of agricultural products, including crops (including 
farming); livestock (including ranching); forestry products; 
hydroponics; nursery stock; or aquaculture, whereby 50% or greater of 
their gross income is derived from the operations.
    Approved lender. A lender that the Agency has determined meets the 
criteria specified in Sec.  5001.9(a) through (c), as applicable, of 
this part.
    Arm's length transaction. A transaction between ready, willing, and 
able disinterested parties who are not affiliated with or related to 
each other and have no security, monetary, or stockholder interest in 
each other.
    Assignment guarantee agreement. A signed, Agency-approved agreement 
between the Agency, the lender, and the holder setting forth the terms 
and conditions of an assignment of a guaranteed portion of a loan or 
any part thereof.
    Assurance agreement. A signed, Agency-approved agreement between 
the Agency and the lender that assures the Agency that the lender is in 
compliance with and will continue to be

[[Page 76771]]

in compliance with Title VI of the Civil Rights Act of 1964, 7 CFR part 
15, and Agency regulations promulgated there under.
    Biomass. Any organic material, excluding paper that is commonly 
recycled and unsegregated solid waste, that is available on a renewable 
or recurring basis, including agricultural crops; trees grown for 
energy production; wood waste; wood residues; plants, aquatic plants 
and grasses; natural fibers; animal waste and other waste materials; 
and fats, oils, and greases, including recycled fats, oils, and 
greases.
    Borrower. The person that borrows, or seeks to borrow, money from 
the lender, including any party or parties liable for the guaranteed 
loan except guarantors.
    Business plan. A comprehensive document that clearly describes the 
borrower's ownership structure and management experience including, if 
applicable, discussion of a parent, affiliates, and subsidiaries; a 
discussion of how the borrower will operate the proposed project, 
including, at a minimum, a description of the business and project, the 
products and services to be provided, pro forma financial statements 
for a period of 2 years, including balance sheet, income and expense, 
and cash flows, and the availability of the resources necessary to 
provide those products and services.
    Collateral. The asset(s) pledged by the borrower in support of the 
loan.
    Commercially available. A system that has a proven operating 
history of viability of at least one year, specific to the proposed 
application. Such a system is based on established design, and 
installation procedures and practices. Professional service providers, 
trades, large construction equipment providers, and labor are familiar 
with installation procedures and practices. Proprietary and balance of 
system equipment and spare parts are readily available. Service is 
readily available to properly maintain and operate the system. An 
established warranty exists for parts, labor, and performance.
    Community support. Sufficient evidence of the area to be served 
that there is enough demand and support for the service or facility to 
make the project economically viable.
    Conditional commitment. An Agency-approved form of commitment to 
the lender that the loan guarantee the lender has requested is approved 
subject to the completion of all conditions and requirements contained 
in the commitment as set forth by the Agency.
    Cooperative organization.
    (1) Any entity that is legally chartered as a cooperative.
    (2) Any entity that is not legally chartered as a cooperative, but 
is owned and operated for the benefit of its members, including the 
manner in which it distributes its dividends and assets, provided those 
members are not employees of the organization.
    Day. Calendar day, unless otherwise stated.
    Debt coverage ratio. The ratio obtained when dividing the 
realistically projected earnings and cash injection before interest, 
taxes, depreciation, and amortization by the annual debt service 
(principal and interest).
    Default. The condition that exists when a borrower is not in 
compliance with the promissory note, the loan agreement, or other 
related documents evidencing the loan.
    Delinquent loan. A loan for which a scheduled loan payment has not 
been received by the due date or within any grace period as stipulated 
in the promissory note and loan agreement.
    Eligible project costs. Those expenses approved by the Agency for 
the project.
    Energy assessment. A report conducted by an experienced energy 
assessor, certified energy manager or professional engineer assessing 
energy cost and efficiency. The report identifies and provides a 
savings and cost analysis of low-cost/no-cost measures, estimates 
overall costs and expected energy savings from the funded improvements, 
and dollars saved per year and provides an estimate of the anticipated 
weighted average payback period in years.
    Energy audit. A report conducted by a Certified Energy Manager or 
Professional Engineer that focuses on potential capital-intensive 
projects and involves detailed gathering of field data and engineering 
analysis. The report will provide detailed project costs and savings 
information with a high level of confidence sufficient for major 
capital investment decisions similar to but in more detail than an 
energy assessment.
    Energy efficiency improvement. A product or process installed in a 
facility, or building, that reduces energy consumption.
    Essential community facility. The physical structure (including 
machinery and/or equipment) financed or the resulting service provided 
to primarily rural residents that combined or severally must:
    (1) Perform or fulfill a function customarily provided by a local 
unit of government;
    (2) Be a public improvement needed for the orderly development of a 
rural community;
    (3) Benefit the community at large;
    (4) Not include commercial or business undertakings (except for 
limited authority for industrial parks); and
    (5) Be within the area of jurisdiction or operation for eligible 
public bodies or a similar local rural service area of a not-for-profit 
corporation.
    Existing business. A business that has been in operation for at 
least one full year. Mergers, changes in the business name, or legal 
type of entity of a currently operating business, or expansions of 
product lines are considered to be existing businesses as long as there 
is not a significant change in operations.
    Feasibility study. An analysis by a qualified consultant of the 
economic, market, technical, financial, and management capabilities of 
a proposed project or business in terms of its expectation for success.
    Future recovery. Funds collected by lender after final loss claim.
    Guaranteed loan. A loan made and serviced by a lender for which the 
Agency has issued a Loan Note Guarantee.
    High Impact Business. A business that is part of an industry that 
has 20% or more of its sales in international markets; offers high 
value, specialized products and services that command high prices; and 
creates jobs with an average wage exceeding 125% of the Federal minimum 
wage.
    Holder. The person or entity, other than the lender, who owns all 
or part of the guaranteed portion of the loan with no servicing 
responsibilities.
    Immediate family. Individuals who are closely related by blood, 
marriage, or adoption, or live within the same household, such as a 
spouse, domestic partner, parent, child, brother, sister, aunt, uncle, 
grandparent, grandchild, niece, or nephew.
    Interim financing. A temporary or short-term loan made with the 
clear intent that it will be repaid through another loan, cash, or 
other financing mechanism.
    Lender. An entity that has been approved by the Agency to originate 
and service loans guaranteed under this part.
    Lender's agreement. The Agency-approved signed form between the 
Agency and the lender setting forth the lender's loan responsibilities 
under an issued Loan Note Guarantee.
    Lender's analysis. The analysis and evaluation of the credit 
factors associated with each guarantee application to ensure loan 
repayment through the use of credit document procedures and an 
underwriting process that is consistent with industry standards and the 
lender's written policy and procedures.

[[Page 76772]]

    Lending entity. An entity that originates and services a loan that 
has not been approved to originate loans under this part.
    Loan agreement. The Agency-approved agreement between the borrower 
and lender containing the terms and conditions of the loan and the 
responsibilities of the borrower and lender.
    Loan classification. The process by which loans are examined and 
categorized by degree of potential loss in the event of default.
    Loan note guarantee. The Agency-approved form containing the terms 
and conditions of the guarantee of an identified loan.
    Loan-to-value ratio. The ratio of the dollar amount of a loan to 
the dollar value of the collateral pledged as security for the loan.
    Local government. A county, municipality, town, township, village, 
or other unit of general government below the State level. The term 
also includes tribal governments when tribal lands are within the 
service area.
    Market value. The amount for which property would sell for its 
highest and best use at a voluntary sale in an arm's length 
transaction.
    Material change. Any change in the purpose of the loan, the 
financial condition of the borrower, or the collateral, that might 
jeopardize loan performance.
    Monetary default. A loan is in monetary default if payment is not 
made within 30 days after the payment due date.
    Negligent loan origination.
    (1) The failure of a lender to perform those services that a 
reasonably prudent lender would perform in originating its own 
portfolio of unguaranteed loans; or
    (2) The failure of the lender to perform its origination 
responsibilities in accordance with its origination policies and 
procedures in use by the lender at the time the loan is made.
    (3) The term includes the concepts of failure to act, not acting in 
a timely manner, or acting in a manner contrary to the manner in which 
a reasonably prudent lender would act.
    Negligent loan servicing.
    (1) The failure of a lender to perform those services that a 
reasonably prudent lender would perform in servicing and liquidating 
its own portfolio of unguaranteed loans; or
    (2) The failure of the lender to perform its servicing 
responsibilities in accordance with its servicing policies and 
procedures in use by the lender at the time the loan is made.
    (3) The term includes the concepts of failure to act, not acting in 
a timely manner, or acting in a manner contrary to the manner in which 
a reasonably prudent lender would act.
    Other lending entity. A lending entity who does not meet the 
definition of regulated or supervised lending entity.
    Participation. Sale of an interest in a loan by the lender wherein 
the lender retains the note, collateral securing the note, and all 
responsibility for loan servicing and liquidation.
    Person. Any individual, corporation, company, foundation, 
association, labor organization, firm, partnership, society, joint 
stock company, group of organizations, public body, or State or local 
government.
    Post-application. The date that the Agency receives an essentially 
completed application. An ``essentially completed'' application is an 
application that contains all parts necessary for the Agency to 
determine borrower and project eligibility and to conduct the technical 
evaluation.
    Pre-application. Information submitted to the Agency for which the 
applicant requests the Agency to make an informal eligibility 
assessment prior to submitting a full application. The information must 
be sufficient for the Agency to make a determination that the borrower 
and project are eligible.
    Pre-commercial technology. Technology that has emerged through the 
research and development process and has technical and economic 
potential for commercial application, but is not yet commercially 
available.
    Preferred lender. An approved lender that, as determined by the 
Agency, also meets the criteria specified in Sec.  5001.9(d) of this 
part.
    Preliminary architectural report. A document normally prepared by a 
professional, licensed architect that describes the existing situation 
and problem, analyzes alternatives, and proposes a specific course of 
action from an architectural and environmental perspective. Sufficient 
information must be provided to adequately assess the need for, the 
feasibility of, and the cost of the project.
    Preliminary engineering report. A document normally prepared by the 
owner's consulting engineer that describes the owner's present 
situation, analyzes alternatives, and proposes a specific course of 
action from an engineering and environmental perspective.
    Promissory Note. A legal instrument that a borrower signs promising 
to pay a specific amount of money at a stated time. ``Note'' or 
``Promissory Note'' shall also be construed to include ``Bond'' or 
other evidence of debt where appropriate.
    Protective advances. Advances made by the lender for the purpose of 
preserving and protecting the collateral where the debtor has failed 
to, and will not or cannot, meet obligations to protect or preserve 
collateral.
    Public body. A municipality, county, or other political subdivision 
of a State; a special purpose district; or an Indian tribe on a Federal 
or State reservation or other Federally recognized Indian tribe or an 
organization controlled by any of the above.
    Qualified consultant. An independent, third-party possessing the 
knowledge, expertise, and experience to perform in an efficient, 
effective, and authoritative manner the specific task required.
    Regulated or supervised lender. A lender that is subject to 
examination or supervision by an appropriate agency of the United 
States or a State that supervises or regulates credit institutions.
    Renewable biomass.
    (1) Materials, pre-commercial thinnings, or invasive species from 
National Forest System land and public lands (as defined in section 103 
of the Federal Land Policy and Management Act of 1976 (43 U.S.C. 1702)) 
that:
    (i) Are byproducts of preventive treatments that are removed to 
reduce hazardous fuels; to reduce or contain disease or insect 
infestation; or to restore ecosystem health;
    (ii) Would not otherwise be used for higher-value products; and
    (iii) Are harvested in accordance with applicable law and land 
management plans and the requirements for old-growth maintenance, 
restoration, and management direction of paragraphs (2), (3), and (4) 
of subsection (e) of section 102 of the Healthy Forests Restoration Act 
of 2003 (16 U.S.C. 6512) and large-tree retention of subsection (f) of 
that section; or
    (2) Any organic matter that is available on a renewable or 
recurring basis from non-Federal land or land belonging to an Indian or 
Indian tribe that is held in trust by the United States or subject to a 
restriction against alienation imposed by the United States, including:
    (i) Renewable plant material, including feed grains; other 
agricultural commodities; other plants and trees; and algae; and
    (ii) Waste material, including crop residue; other vegetative waste 
material (including wood waste and wood residues); animal waste and 
byproducts (including fats, oils, greases, and manure); and food waste 
and yard waste.
    Renewable energy.

[[Page 76773]]

    (1) Energy derived from a wind, solar, renewable biomass, ocean 
(including tidal, wave, current, and thermal), geothermal, or 
hydroelectric source;
    (2) Hydrogen derived from renewable biomass or water using an 
energy source described in paragraph (1) of this definition.
    Renewable energy system. A system that produces or produces and 
delivers usable energy from a renewable energy source.
    Report of loss. An Agency-approved form used by lenders when 
reporting a loss under an Agency guarantee.
    Rural or rural area.
    (1) For the purpose of providing Community Facilities loan 
guarantees, rural and rural area are defined as any area not in a city, 
town, or Census Designated Place with a population of more than 20,000 
inhabitants according to the latest decennial census of the United 
States.
    (2) For the purpose of providing Water and Waste Disposal loan 
guarantees, rural and rural area are defined as any area not in a city, 
town, or Census Designated Place with a population in excess of 10,000 
inhabitants, according to the latest decennial census of the United 
States.
    (3) For purposes of providing Business and Industry and Renewable 
Energy/Energy Efficiency loan guarantees, rural and rural area are 
defined as any area of a State not in a city or town that has a 
population of more than 50,000 inhabitants, according to the latest 
decennial census of the United States, and the contiguous and adjacent 
urbanized area.
    (4) Notwithstanding any other provision of this definition, in 
determining which census blocks in an urbanized area are not in a rural 
area, the Agency shall exclude any cluster of census blocks that would 
otherwise be considered not in a rural area only because the cluster is 
adjacent to not more than 2 census blocks that are otherwise considered 
not in a rural area under this definition.
    (5) For the purposes of this definition, cities and towns are 
incorporated population centers with definite boundaries, local self 
government, and legal powers set forth in a charter granted by the 
State. For Puerto Rico, Census Designated Place, as defined by the U.S. 
Census Bureau, will be used as the equivalent to city or town. For the 
purpose of defining a rural area in the Republic of Palau, the 
Federated States of Micronesia, and the Republic of the Marshall 
Islands, the Agency shall determine what constitutes rural and rural 
area based on available population data.
    Small business. An entity is considered a small business in 
accordance with the Small Business Administration's small business size 
standards by the North American Industry Classification System found in 
Title 13 CFR part 121. A private entity, including a sole 
proprietorship, partnership, corporation, cooperative (including a 
cooperative qualified under section 501(c)(12) of the Internal Revenue 
Code), and an electric utility, including a Tribal or governmental 
electric utility, that provides service to rural consumers on a cost-
of-service basis without support from public funds or subsidy from the 
Government authority establishing the district, provided such utilities 
meet Small Business Administration's definition of small business. 
These entities must operate independent of direct Government control. 
With the exception of the entities described above, all other not-for-
profit entities are excluded.
    Startup business. A business that has been in operation for less 
than one full year. Startup businesses include newly formed entities 
leasing space or building ground up facilities in a new market area, 
even if the owners of the startup business own affiliated businesses 
doing the same kind of business. Newly formed entities that are buying 
existing businesses or facilities will be considered an existing 
business as long as the business or facility being bought remains in 
operation and there is no significant change in operations.
    State. Any of the 50 States of the United States, the Commonwealth 
of Puerto Rico, the District of Columbia, the U.S. Virgin Islands, 
Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, 
the Republic of Palau, the Federated States of Micronesia, and the 
Republic of the Marshall Islands.
    State Bond Banks and State Bond Pools. An entity authorized by the 
State to issue State debt instruments and utilize the funds received to 
finance projects that qualify for a guaranteed loan under this part.
    Tangible net worth. Tangible assets minus liabilities.
    Total project cost. The sum of all costs associated with a 
completed project.
    Transfer and assumption. The conveyance by a debtor to an assuming 
party of the assets, collateral, and liabilities of the loan in return 
for the assuming party's binding promise to pay the outstanding debt.
    Water and waste disposal facility. A physical structure or series 
of structures used to provide water and waste disposal services. Such 
structures include, but are not necessarily limited to, those for rural 
drinking water, sanitary sewage, solid waste disposal, and storm 
wastewater disposal.
    Working capital. Current assets available to support a business' 
operations and growth. Working capital is calculated as current assets 
less current liabilities.


Sec.  5001.3  Agency authorities.

    (a) Exception authority. Except as specified in paragraphs (a)(1) 
through (4) of this section, the applicable Administrator may, on a 
case-by-case basis, make exceptions to any requirement or provision of 
this part, if such exception is necessary to implement the intent of 
the authorizing statute in a time of national emergency or in 
accordance with a Presidentially-declared disaster, or when such an 
exception is in the best financial interests of the Federal Government 
and is otherwise not in conflict with applicable law.
    (1) Lender and borrower eligibility. No exception to lender or 
borrower eligibility can be made.
    (2) Project eligibility. No exception to project eligibility can be 
made.
    (3) Rural area definition. No exception to the definition of rural 
area, as defined in Sec.  5001.2, can be made.
    (4) Term length. No exception to the maximum length of the loan 
term, as specified in Sec.  5001.31(c), can be made.
    (b) Review or appeal rights. A person has review or appeal rights 
in accordance with 7 CFR part 11.


Sec.  5001.4  Oversight and monitoring.

    (a) General. The lender will cooperate fully with Agency oversight 
and monitoring of all lenders involved in any manner with any guarantee 
under this program to ensure compliance with this part, including 
ensuring lenders continue to meet the criteria for being an approved 
lender or a preferred lender. Such oversight and monitoring will 
include, but is not limited to, reviewing lender records and meeting 
with lenders. In addition, the Agency will review all approved and 
preferred lenders for eligibility at least every two years.
    (b) Reports and notifications. The Agency will require lenders to 
submit to the Agency reports and notifications to facilitate the 
Agency's oversight and monitoring. These reports and notifications 
include, but are not necessarily limited to:
    (1) Periodic reports, to be submitted semiannually, regarding the 
condition of its Agency guaranteed loan portfolio (including borrower 
status and loan classification) and any material change in the general 
financial condition of the

[[Page 76774]]

borrower since the last periodic report was submitted.
    (2) Monthly default reports for each loan in monetary default using 
a form approved by the Agency.
    (3) Notification within 15 calendar days of:
    (i) Any loan agreement violation by any borrower, including when a 
borrower is 30 days past due or is otherwise in default;
    (ii) Any permanent or temporary reduction in interest rate; and
    (iii) Any downgrade in the loan classification of any loan made 
under this part.
    (4) If a lender receives a final loss payment, an annual report on 
its collection activities for each unsatisfied account for 3 years 
following payment of the final loss claim.


Sec.  5001.5  Forms, regulations, and instructions.

    Copies of all forms, regulations, and instructions referenced in 
this part may be obtained through the Agency.

Basic Eligibility Provisions


Sec.  5001.6  Project eligibility.

    To be eligible for a guaranteed loan under this part, at a minimum, 
a borrower and project, as applicable, must meet each of the 
requirements specified in paragraphs (a) through (c) of this section.
    (a) The project must meet the requirements specified in subpart B 
of this part.
    (b) The borrower must meet the financial metric criteria specified 
in paragraphs (b)(1) through (b)(3) of this section. These financial 
metric criteria shall be calculated from the realistic information in 
the pro forma statements or borrower financial statements, submitted in 
accordance with Sec.  5001.12(a)(10), of a typical operating year after 
the project is completed and stabilized. For projects that the Agency 
deems to be more risky, such as racetracks and water parks, the Agency 
will require higher underwriting standards for such projects.
    (1) A debt coverage ratio of 1.0 or higher;
    (2) A debt-to-tangible net worth ratio of 4:1 or lower for startup 
businesses and of 9:1 or lower for existing businesses.
    (3) A loan-to-value ratio of no more than 1.0.
    (c) For projects that are determined by a service area, boundaries 
for the proposed service area must be chosen in such a way that no user 
or area will be excluded because of race, color, religion, sex, marital 
status, age, disability, or national origin. This does not preclude:
    (1) Financing or constructing projects in phases when it is not 
practical to finance or construct the entire project at one time, and
    (2) Financing or constructing facilities where it is not 
economically feasible to serve the entire area, provided economic 
feasibility is determined on the basis of the entire system or facility 
and not by considering the cost of separate extensions to, or parts 
thereof. Additionally, the borrower must publicly announce a plan for 
extending service to areas not initially receiving service. Also, the 
borrower must provide written notice to potential users located in the 
areas not to be initially served.


Sec.  5001.7  Unauthorized projects and purposes.

    Loans guaranteed under this part must not be used for any projects 
other than those authorized in subpart B of this part. In addition, 
loan funds may not be used to finance:
    (a) Investment or arbitrage, or speculative real estate investment.
    (b) Golf courses or similar recreational facilities listed in the 
annual Notice of Funds Availability.
    (c) Any business deriving more than 10% of its annual gross revenue 
from gambling activity, excluding State-authorized lottery proceeds 
and, for public bodies and for not-for-profit approved projects only, 
any other funds derived from gambling activity, as approved by the 
Agency, conducted for the purpose of raising funds for the approved 
project.
    (d) Prostitution or businesses deriving income from activities of a 
prurient sexual nature.
    (e) Any guarantee of a:
    (1) Line of credit;
    (2) Lease payment; or
    (3) Loan made by other Federal agencies.
    (f) Any project eligible for Rural Rental Housing and Rural 
Cooperative Housing loans under sections 515, 521, and 538 of the 
Housing Act of 1949, as amended.
    (g) Finders', packagers', or loan brokers' fees.
    (h) Any business deriving income from illegal drugs, drug 
paraphernalia, or any other illegal product or activity.
    (i) To pay the borrower for the rental of equipment or machinery 
owned by the borrower.
    (j) The payment of either a Federal judgment or a debt owed to the 
United States, excluding other Federal loans.
    (k) Any project that creates, directly or indirectly, a conflict of 
interest or an appearance of a conflict of interest.
    (l) Properties to be used for commercial rental when the borrower 
has no control over tenants and services offered except for industrial-
site infrastructure development and limited sections of essential 
community facilities when the activity in the leased space is related 
to and enhances the primary purpose for which the facility is being 
established by the borrower.
    (m) Any project located within the Coastal Barriers Resource System 
that does not qualify for an exception as defined in section 6 of the 
Coastal Barriers Resource Act, 16 U.S.C. 3501 et seq.
    (n) Any project located in a special flood or mudslide hazard area 
as designated by the Federal Emergency Management Agency in a community 
that is not participating in the National Flood Insurance Program 
unless the project is an integral part of a community's flood control 
plan.
    (o) Any other similar project or purpose that the Agency determines 
is ineligible for funding under this part and publishes in a Federal 
Register notice.


Sec.  5001.8  Borrower eligibility.

    (a) Eligible entities. To be eligible, a borrower must meet the 
requirements specified in paragraphs (a)(1) and (2) of this section and 
in subpart B to this part, as applicable.
    (1) Citizenship. Citizenship requirements are as follows:
    (i) Individual borrowers must be citizens of the United States 
(U.S.), the Republic of Palau, the Federated States of Micronesia, the 
Republic of the Marshall Islands, or American Samoa, or reside in the 
U.S. after legal admittance for permanent residence.
    (ii) Entities other than individuals must be at least 51% owned or 
controlled by persons who are either citizens as identified under 
paragraph (a)(1)(i) of this section or are legally admitted permanent 
residents residing in the U.S.
    (2) Legal authority and responsibility. Each borrower must have, or 
obtain, the legal authority necessary to construct, operate, and 
maintain the proposed facility and services and to obtain, give 
security for, and repay the proposed loan.
    (b) Ineligible entities. A borrower will be considered ineligible 
for a guarantee if either the borrower or any owner with more than 20% 
ownership interest in the borrower:
    (1) Has an outstanding judgment obtained by the U.S. in a Federal 
Court (other than U.S. Tax Court),
    (2) Is delinquent on the payment of Federal income taxes,

[[Page 76775]]

    (3) Is delinquent on a Federal debt, or
    (4) Is debarred or suspended from receiving Federal assistance.


Sec.  5001.9  Participation eligibility requirements.

    Only lenders are eligible to participate in the guaranteed loan 
programs described in this part.
    (a) General requirements. The requirements in this paragraph apply 
to all lending entities who wish to participate in the guaranteed loan 
programs described in this part.
    (1) Loan origination and servicing policies and procedures. The 
lending entity must submit a written summary of its loan origination 
and servicing policies and procedures, addressing, at a minimum, the 
areas specified in paragraphs (a)(1)(i) through (ix) of this section. 
At the Agency's request, the lending entity must make available any or 
all of its loan origination and servicing policies and procedures.
    (i) Internal credit review process.
    (ii) Underwriting process.
    (iii) Portfolio management.
    (iv) Delinquent loan handling.
    (v) Liquidation process.
    (vi) Releases.
    (vii) Termination.
    (viii) Final loss claims.
    (ix) Exceptions to loan policies and procedures and other 
information relevant to Agency guaranteed loans.
    (2) Audit and management control system. The lending entity must 
maintain internal audit and management control systems to evaluate and 
monitor the overall quality of its loan origination and servicing 
activities.
    (3) Debarment and suspension. The lending entity must not be 
otherwise debarred or suspended by the Federal government.
    (b) Regulated or supervised lending entities. The requirements for 
a regulated or supervised lending entity that has no outstanding 
guaranteed loans with the Agency to be eligible to participate are 
identified in paragraph (b)(1) of this section. The requirements for a 
regulated or supervised lending entity that has at least one 
outstanding guaranteed loan with the Agency to be eligible to 
participate are identified in paragraph (b)(2) of this section.
    (1) No outstanding Agency guaranteed loans. A regulated or 
supervised lending entity that does not have any outstanding guaranteed 
loans as of January 16, 2009 with the Agency must apply for lender 
approval.
    (i) Lender application. If the lending entity is a state chartered 
entity, the lending entity must submit the application, and other 
required documentation, to the State in which it is chartered. If the 
lending entity is a federally chartered entity, the lending entity must 
submit the application, and other required documentation, to the State 
in which the entity's headquarters is located.
    (ii) Policies and procedures. The lending entity must submit with 
the lender application a written summary of its loan origination and 
servicing policies and procedures, as specified in paragraph (a)(1) of 
this section.
    (iii) Lending history and experience. The lending entity must 
submit with the lender application a description of its lending history 
and experience, including:
    (A) Evidence of demonstrated expertise in loan origination, making, 
securing, servicing, and collecting loans;
    (B) Length of time in the commercial lending business;
    (C) Its experience with government guaranteed lending, particularly 
within any of the subject programs;
    (D) The range and volume of its lending and servicing activity;
    (E) The current status of its loan portfolio;
    (F) Its commercial loan fee structure;
    (G) The level of experience of its management, lending, and 
servicing staff; and
    (H) Audited financial statements not more than 1 year old.
    (iv) Approval process. The Agency will review the application, 
including the summary of the lending entity's loan origination and 
servicing policies and procedures, submitted under paragraph (b)(1) of 
this section, to determine whether the lending entity is approved for 
participation under this part. The Agency may request additional 
clarification or information as necessary in its determination of 
lender approval.
    (A) The Agency will approve or disapprove the lending entity on the 
basis of the information in the application, including the information 
describing the lending entity's loan origination and servicing policies 
and procedures.
    (B) The lending entity must be in good standing with its regulator 
to be approved for participation.
    (2) With outstanding Agency guaranteed loans. A regulated or 
supervised lending entity that has at least one outstanding guaranteed 
loan with the Agency as of January 16, 2009 is required to certify to 
the Agency that the lending entity is in good standing with its 
regulator and to submit a written summary of its loan origination and 
servicing policies and procedures, as specified in paragraph (a)(1) of 
this section.
    (i) The lending entity must submit this certification and 
description either with, or prior to, its first application for loan 
guarantee under this part.
    (ii) Such lending entity is approved for participation under this 
part when the Agency receives the lending entity's certification that 
the lending entity is in good standing with its regulator and the 
written summary of the lending entity's loan origination and servicing 
policies and procedures, as specified in paragraph (a)(1) of this 
section.
    (3) Lender's agreement. If approved, the lender may sign a Lender's 
Agreement with the Agency. If the Lender's Agreement is executed by the 
lender and the Agency, the lender may submit an application for 
guarantee in any State in which it is authorized to do business. 
Approval for participation constitutes approval to participate in all 
guaranteed loan programs described in this part.
    (4) Maintenance of approved status. Approved status is maintained 
as long as the lender remains in good standing with its regulator, in 
conformance with this part, or until otherwise notified by the Agency. 
If a lender fails to maintain its status as a Lender or has no 
outstanding loans with the Agency for two consecutive years, it must 
reapply under this section for lender approval.
    (c) Other lending entities. Any lending entity not eligible in 
paragraph (b) of this section that wishes to originate a new loan under 
this part may apply for approved status, as specified in paragraph 
(c)(2) of this section, provided it meets the criteria specified in 
paragraph (c)(1) of this section.
    (1) Criteria for submitting an application for lender approval. An 
other lending entity may submit an application for lender approval 
provided the lending entity has:
    (i) A minimum net worth of $2.5 million;
    (ii) Liquid assets of at least $500,000;
    (iii) Acceptable line(s) of credit that totals $5 million or more; 
and
    (iv) Undergone an examination acceptable to the Agency.
    (2) Application for lender approval. The lending entity must submit 
an application to the Rural Development State Office in the State in 
which the entity is chartered providing the information specified in 
paragraphs (c)(2)(i) through (viii) of this section.
    (i) A written summary of its loan origination and servicing 
policies and procedures, as specified in paragraph (a)(1) of this 
section.
    (ii) Evidence showing that it has the necessary capital, resources, 
and funding capacity to successfully meet its responsibilities.

[[Page 76776]]

    (iii) Copies of any license, charter, or other evidence of its 
legal authority to engage in the proposed loan making and servicing 
activities.
    (iv) Certificate(s) of good standing from the States in which the 
lender is licensed and intends to conduct business.
    (v) A description of its lending history and experience, including:
    (A) Evidence of demonstrated expertise in loan origination, making, 
securing, servicing, and collecting loans;
    (B) Length of time in the commercial lending business;
    (C) Its experience with government guaranteed lending, particularly 
within any of the subject programs;
    (D) The range and volume of its lending and servicing activity;
    (E) The current status of its loan portfolio;
    (F) Its commercial loan fee structure;
    (G) The level of experience of its management, lending, and 
servicing staff; and
    (H) Its audited financial statements not more than 1 year old.
    (vi) Documented sources of its funds for funding and closing loans.
    (vii) Office location(s) and its proposed geographic lending 
area(s).
    (viii) Results of the examination required under paragraph (c)(1) 
of this section.
    (3) Agency review. The Agency will review the application, 
including the lending entity's loan origination and servicing policies 
and procedures, submitted under paragraph (b)(1) of this section to 
determine whether the lending entity is approved for participation 
under this part. The Agency may request additional clarification or 
information as necessary in its determination of lender approval. The 
Agency will approve or disapprove the lending entity on the basis of 
the information in the application, including the information 
describing the entity's loan origination and servicing policies and 
procedures.
    (4) Lender's agreement. If approved, the lender may sign a Lender's 
Agreement with the Agency. If the Lender's Agreement is executed by the 
lender and the Agency, the lender may submit an application for 
guarantee in any State in which it is authorized to do business.
    (5) Maintenance of approved status. Approved status is maintained 
as long as the lender meets or exceeds minimum Agency requirements. If 
the Lender fails to maintain its status as a lender or has no 
outstanding loans with the Agency for two consecutive years, it becomes 
a lending entity and must reapply under this section for lender 
approval.
    (d) Preferred lenders. Approved lenders may apply to the Agency for 
preferred lender status for the Business and Industry (B&I) guaranteed 
loan program in subpart B of this part. In addition, this preferred 
lender status may be expanded to include other programs contained in 
this part pursuant to notice published in the Federal Register.
    (1) Criteria for receiving preferred lender status. The lender must 
meet each of the requirements specified in paragraphs (d)(1)(i) through 
(vii) of this section to obtain preferred lender status.
    (i) Have a lender loss rate not in excess of the maximum 
``preferred lender'' loss rate established by the Agency and published 
in a Federal Register Notice.
    (ii) Have made a minimum of 10 guaranteed Business and Industry 
loans, unless another minimum number is specified in a notice in the 
Federal Register.
    (iii) Show a consistent practice of submitting applications for 
guaranteed loans containing accurate information supporting a sound 
loan proposal.
    (iv) Have no more than one instance of Federal government negligent 
loan origination or servicing where a loss has been paid.
    (v) Not be under any regulatory enforcement action, such as a cease 
and desist order, written agreement, or an appointment of conservator 
or receiver.
    (vi) Demonstrated high standards of professional competence for the 
lender's staff, particularly key underwriting and servicing staff.
    (vii) Adequate lender facilities to conduct its Agency business at 
a high level of performance.
    (2) Locations. The lender must identify in its application for 
preferred lender status the States in which the lender desires to 
receive preferred lender status and its branch offices which the lender 
desires to be considered by the Agency for approval. The Agency will 
determine which branches of the lender have the necessary experience 
and ability to participate in the preferred lender program based on the 
information submitted in the lender application and on Agency 
experience.
    (3) Timeframe and renewal. A lender who is determined to be 
eligible for preferred lender status will be granted such status for a 
period not to exceed four years from the date the Lender's Agreement is 
executed. A lender must submit a written request for renewal of a 
Lender's Agreement with preferred lender status which includes 
information:
    (i) Updating the material submitted in the initial application; and
    (ii) Addressing any new criteria established by the Agency since 
the initial application.
    (4) Revocation of preferred lender status. The Agency may revoke a 
lender's preferred lender status at any time during the four-year term 
for cause. Any of the following instances constitute cause for revoking 
or not renewing preferred lender status:
    (i) Violation of a term of the Lender's Agreement;
    (ii) Failure to maintain preferred lender eligibility criteria;
    (iii) Knowingly submitting false or misleading information to the 
Agency;
    (iv) Basing a request on information known to be false;
    (v) Deficiencies that indicate an inability to process or service 
Agency guaranteed loan programs loans in accordance with this part;
    (vi) Failure to correct cited deficiencies in loan documents upon 
notification by the Agency;
    (vii) Failure to submit status reports in a timely manner;
    (viii) Failure to use forms, or follow its loan origination and 
servicing policies and procedures accepted by the Agency; or
    (ix) Failure to reimburse the holder the amount of repurchase, with 
accrued interest, in accordance with Sec.  5001.17(i)(1).


Sec.  5001.10  [Reserved]

Basic Guarantee Application Provisions


Sec.  5001.11  Guarantee application process.

    (a) Beginning the process. Any lender may submit a pre-application 
or a full application to begin an application for guarantee.
    (1) Pre-application. Based on the information in the pre-
application, the Agency will make an informal assessment of the 
eligibility of the borrower and project. The Agency will provide 
written informal comments regarding the pre-application's strengths and 
weaknesses. The Agency's assessment may change based on subsequently 
submitted information, is solely advisory in nature, does not obligate 
the Agency to approve a guarantee request, and is not considered a 
favorable or adverse decision by the Agency.
    (2) Guarantee application. For each guarantee request, the lender 
must submit to the Agency an application that is in conformance with 
Sec.  5001.12.
    (b) Guarantee application evaluation. All loan guarantee 
applications will be evaluated according to this part.
    (1) The Agency will notify the lender in writing of its decision.

[[Page 76777]]

    (2) In the evaluation of the application, the Agency may require 
the lender to obtain additional assistance in those areas where the 
lender does not have the requisite expertise to originate or service 
the loan. For the purposes of this paragraph ``those areas'' mean:
    (i) The type and complexity of the financing (e.g., asset based 
financing, cash flow financing, bond financing), and
    (ii) The industries with which the lender has little or no 
origination and/or servicing experience.
    (c) Loan approval and issuing the guarantee. Complete applications 
from preferred lenders will be approved, subject to the availability of 
funds, or rejected not later than 10 business days after receipt. For 
the purpose of determining the application processing timeframes, an 
application will not be considered complete until all information 
required to make an approval decision, including a completed 
environmental review, is received by the Agency.


Sec.  5001.12  Application for Loan Guarantee Content.

    All loan guarantee applications must contain the information 
specified in paragraph (a) of this section for approved lenders and in 
paragraph (b) of this section for preferred lenders.
    (a) Approved lender loan guarantee applications. Loan guarantee 
applications from approved lenders must contain the following:
    (1) Agency-approved application forms;
    (2) Lender's analysis and credit evaluation (conforming to Sec.  
5001.16(b));
    (3) Environmental information required by the Agency to conduct its 
environmental reviews (as specified in Sec.  5001.16(h));
    (4) Technical reports, energy audits, and energy assessments (as 
specified in subpart B of this part);
    (5) Appraisals acceptable to the Agency, if available;
    (6) Business plan, unless the information is contained in the 
feasibility study or in the lender's analysis;
    (7) Feasibility study (as specified in subpart B);
    (8) If the application is for 5 or more residential units, 
including nursing homes and assisted-living centers, an Affirmative 
Fair Housing Marketing Plan that is in conformance with 7 CFR 
1901.203(c)(3);
    (9) Current credit reports or equivalent on the borrower and any 
other person liable for the debt, except for public bodies;
    (10) Financial statements as follows:
    (i) For borrowers that have been in existence for one or more 
years,
    (A) The most recent audited financial statements of the borrower if 
the guaranteed loan is $3 million or more, unless alternative financial 
statements are authorized by the Agency; or
    (B) The most recent audited or Agency-acceptable financial 
statements of the borrower if the guaranteed loan is less than $3 
million.
    (ii) For borrowers that have been in existence for less than one 
year, the most recent Agency-authorized financial statements of the 
borrower regardless of the amount of the guaranteed loan request.
    (iii) Depending on the complexity of the project and the financial 
condition of the borrower, the Agency may request additional financial 
statements and additional related information; and
    (11) Any other information as determined by the Agency is necessary 
to evaluate the application.
    (12) If the lending entity is not yet an approved lender, the 
application for lender approval specified in Sec.  5001.9(b) or (c), as 
applicable.
    (b) Preferred lender loan guarantee applications. Loan guarantee 
applications from preferred lenders must contain the following:
    (1) A copy of the Application for Loan Guarantee;
    (2) Information sufficient for the Agency to confirm project and 
borrower eligibility;
    (3) A copy of lender's loan evaluation and analysis;
    (4) An internal loan approval document showing approval by in-house 
appropriate office/committee; and
    (5) Environmental information required by the Agency to conduct its 
environmental reviews (as specified in Sec.  5001.16(h)).


Sec. Sec.  5001.13-5001.14  [Reserved]

Basic Lender Provisions


Sec.  5001.15  Lender responsibilities--General.

    (a) Lenders must ensure that proposals for facilities seeking a 
guarantee under this part comply with all Federal, State, and local 
laws and regulatory rules that are in existence and that affect the 
project, the borrower, or lender activities.
    (b) Any lender involved in any manner with any guarantee under this 
part must cooperate fully with all oversight and monitoring efforts of 
the Agency or its representatives as specified in Sec.  5001.4.
    (c) Any action or inaction on the part of the Agency does not 
relieve the lender of its responsibilities to originate and service the 
loan guaranteed under this part.
    (d) The lender must notify the Agency of any changes to its loan 
origination and servicing policies and procedures provided under Sec.  
5001.9(a). For any changes to the lender's loan origination and 
servicing policies and procedures that are inconsistent with the 
requirements of this part, the lender must notify the Agency in writing 
and receive written Agency approval prior to applying the changes to 
loan guarantees under this part.
    (e) The lender must compile and maintain in its files a complete 
application for each guaranteed loan for at least one year after the 
final loss has been paid.
    (f) The lender must maintain internal audit and management control 
systems to evaluate and monitor the overall quality of its loan 
origination and servicing activities.


Sec.  5001.16  Lender responsibilities--Origination.

    (a) General. The lender is responsible for originating all loans in 
accordance with its loan origination policies and procedures at the 
time the loan is made and with the requirements of this part. Where a 
lender's loan origination policies and procedures address a 
corresponding requirement in this part, the lender must comply with 
whichever is more stringent, unless otherwise approved by the Agency.
    (1) The Agency may require, at its discretion, an independent 
credit risk analysis (e.g., a credit rating or assessment).
    (2) The lender must provide the Agency the lender's classification 
of the loan no later than 90 days after loan closing.
    (b) Credit evaluation. For all applications for guarantee, the 
lender must prepare a credit evaluation that is consistent with Agency 
standards found in this part and with the policies and procedures of 
the lender submitting the application. Where a lender's policies and 
procedures address a corresponding requirement in this part, the lender 
must comply with whichever is more stringent, unless otherwise provided 
in paragraph (a) of this section. An acceptable credit evaluation must:
    (1) Use credit documentation procedures and an underwriting process 
that are consistent with generally accepted commercial lending 
practices, and the lender's own policies, procedures, and lending 
practices, and
    (2) Include an analysis of the credit factors associated with each 
guarantee application to ensure loan repayment,

[[Page 76778]]

including consideration of each of the following five elements.
    (i) Credit worthiness. Those financial qualities that generally 
impel the borrower to meet its obligations as demonstrated by its 
credit history.
    (ii) Cash flow. A borrower's ability to produce sufficient cash to 
repay the loan as agreed.
    (iii) Capital. The financial resources that the borrower currently 
has and those it is likely to have when payments are due. The borrower 
must be adequately capitalized.
    (iv) Collateral. The assets pledged by the borrower in support of 
the loan. Adequacy will be based on market value. For the purchase of 
cooperative stock, the lender must at least secure the loan with a lien 
on the stock acquired with loan funds, an assignment of any patronage 
refund, and the full and unconditional personal, partnership, or 
corporate guarantee of the borrower.
    (v) Conditions. The general business environment and status of the 
borrower's industry.
    (c) Appraisals. Lenders are required to provide real property and 
chattel collateral appraisals conducted by an independent qualified 
appraiser in accordance with the Uniform Standards of Professional 
Appraisal Practices or successor standards. Complete appraisals must be 
submitted to the Agency before loan closing.
    (1) All appraisals used to establish the fair market value of the 
real property must not be more than 1 year old.
    (2) All appraisals will include consideration of the potential 
effects from a release of hazardous substances or petroleum products or 
other environmental hazards on the market value of the collateral as 
determined in accordance with the appropriate ASTM Real Estate 
Assessment and Management environmental standards.
    (d) Personal, partnership, and corporate guarantees.
    (1) Secured, unconditional personal, partnership, and corporate 
guarantees may be used to determine the security of the loan. 
Unsecured, unconditional personal, partnership, and corporate 
guarantees will not be considered in determining whether a loan is 
adequately secured for loan making purposes.
    (2) Agency-approved, unsecured personal, partnership, and corporate 
guarantees for the full term of the loan and at least equal to the 
guarantor's percent interest in the borrower, times the loan amount are 
required from those owning greater than a 20% interest in the borrower, 
unless the lender documents to the Agency's satisfaction that 
collateral, equity, cash flow, and profitability indicate an above-
average ability to repay the loan. When warranted by an Agency 
assessment of potential financial risk, Agency-approved guarantees may 
also be required of parent, subsidiaries, or affiliated companies 
(owning less than a 20% interest in the borrower) and require security 
for any guarantee provided under this section. Exceptions to the 
requirement for personal guarantees must be requested by the lender and 
approved by the Agency on a case-by-case basis. The lender must 
document that collateral, equity, cash flow, and profitability indicate 
an above-average ability to repay the loan.
    (3) The guarantors will execute an Agency-approved unconditional 
guarantee form.
    (i) Any amounts paid by the Agency on account of liabilities of an 
Agency guaranteed loan borrower will constitute a Federal debt owed to 
the Agency by the guaranteed loan borrower. In such case, the Agency 
may use all remedies available to it, including offset under the Debt 
Collection Improvement Act of 1996, to collect the debt from the 
borrower.
    (ii) Any amounts paid by the Agency pursuant to a claim by a 
guaranteed program lender will constitute a Federal debt owed to the 
Agency by a third-party guarantor of the loan, to the extent of the 
amount of the third-party guarantee. In such case, the Agency may use 
all remedies available to it, including offset under the Debt 
Collection Improvement Act of 1996, to collect the debt from the third-
party guarantor.
    (iii) In all instances under paragraphs (d)(3)(i) and (ii) of this 
section, interest charges will be assessed in accordance with 7 CFR 
1951.133.
    (e) Design requirements. The lender must ensure that all projects 
are designed utilizing accepted architectural and engineering 
practices, taking into consideration any Agency comments when the 
facility is being designed, and conform to applicable Federal, State, 
and local codes and requirements or other Agency-approved code. The 
lender must also ensure that the planned project will be fully 
constructed, within the approved budget, to facilitate completion of 
the loan purpose and will be suitable, once completed, for the 
borrower's needs in accordance with the borrower's loan application.
    (f) Monitoring requirements. The lender must monitor the progress 
of construction and ensure that construction conforms to applicable 
Federal, State, and local code requirements and proceeds in accordance 
with the approved plans, specifications, and contract documents. The 
lender must also ensure that funds are used for eligible project costs. 
The lender must expeditiously report any problems in project 
development to the Agency.
    (g) Compliance with other Federal laws. Lenders must comply with 
other applicable Federal laws including Equal Employment Opportunities, 
Americans with Disabilities Act, Equal Credit Opportunity Act, Fair 
Housing Act, and the Civil Rights Act of 1964.
    (h) Environmental responsibilities. The lender must ensure that the 
borrower has:
    (1) Provided the necessary environmental information to enable the 
Agency to undertake its environmental review process in accordance with 
subpart G of either 7 CFR part 1940 or 7 CFR part 1794 or successor 
regulations, including the provision of all required Federal, State, 
and local permits;
    (2) Complied with any mitigation measures required by the Agency; 
and
    (3) Not taken any actions or incurred any obligations with respect 
to the proposed project that would either limit the range of 
alternatives to be considered during the Agency's environmental review 
process or which would have an adverse effect on the environment.
    (i) Conflicts of interest. The lender must report to the Agency all 
conflicts of interest and appearances of conflicts of interest.
    (j) Surety. Surety will be required in cases when the guarantee 
will be issued prior to completion of construction unless the 
contractor will receive a lump sum payment at the end of work. Surety 
will be made a part of the contract, if the applicant requests it or if 
the contractor requests partial payments for construction work. In such 
cases where no surety is provided and the project involves pre-
commercial technology, first of its type in the U.S., or new designs 
without sufficient operating hours to prove their merit, a latent 
defects bond may be required to cover the work.


Sec.  5001.17  Lender's responsibilities--Servicing.

    (a) General. The lender is responsible for servicing the loan in 
accordance with the Lender's Agreement, this part, and its loan 
servicing policies and procedures. Where a lender's loan servicing 
policies and procedures address a corresponding requirement in this 
part or in the Lender's Agreement, the lender must comply with 
whichever

[[Page 76779]]

is more stringent, unless otherwise approved by the Agency.
    (1) The lender must ensure that the borrower has obtained, and will 
maintain for the life of the loan, all necessary insurance coverage 
appropriate to the proposed project.
    (2) If the Agency determines that the lender is not in compliance 
with its servicing responsibilities, the Agency reserves the right to 
take any action the Agency determines necessary to protect the Agency's 
interests with respect to the loan. If the Agency exercises this right, 
the lender must cooperate with the Agency. Any cost to the Agency 
associated with such action will be assessed against the lender.
    (b) Certification. The lender will certify in the Lender's 
Agreement that it will service the guaranteed loan according to Agency 
requirements and the lender's servicing policies and procedures and 
that, where the lender's policies and procedures address corresponding 
requirements of this part, it will comply with whichever is more 
stringent, unless otherwise provided in paragraph (a) of this section.
    (c) Audits. When applicable, the lender will require an audit of 
the borrower in accordance with Office of Management and Budget 
requirements.
    (d) Financial reports. Lenders are required to submit financial 
reports of the borrower as specified in paragraphs (d)(1) and (d)(2) of 
this section.
    (1) For regulated or supervised lenders, the information that would 
be contained in financial reports required by the appropriate 
regulatory institution. Unless otherwise provided in the Conditional 
Commitment, such information must be submitted at the same time it 
should be made available to the appropriate regulatory institution.
    (2) For other lenders, financial reports as required in the 
Conditional Commitment.
    (e) Collateral inspection and release. The lender must inspect the 
collateral as often as necessary to properly service the loan. The 
Agency will require prior approval of the release of collateral, except 
in those instances where the proceeds are used to pay down debt in 
order of lien priority, or to acquire replacement equipment, or where 
the release of collateral is made under the abundance of collateral 
provision of the applicable security agreement. Appraisals on the 
collateral being released will be required on all transactions 
exceeding $250,000 and will be at the expense of the borrower. The 
appraisal must meet the requirements of Sec.  5001.16(c). The sale or 
release of collateral must be based on an arm's length transaction, 
unless otherwise approved by the Agency in writing.
    (f) Transfers and assumptions.
    (1) General. Any time that a third party assumes a loan guaranteed 
under this part, it shall be processed and approved by the Agency as if 
it were a new loan guarantee.
    (2) Processing transfers and assumptions. Subject to Agency 
approval, the lender may release the transferor (including any 
guarantor) from liability, regardless of the amount of the loan being 
transferred or assumed.
    (i) Loan terms cannot be changed unless previously approved in 
writing by the Agency with the concurrence of the holder and transferor 
(including guarantor if it has not been released from personal 
liability). Any new loan term cannot exceed those authorized in this 
part as measured from the date the loan was initially guaranteed.
    (ii) In the case of a transfer and assumption of less than the 
outstanding balance, the lender (if holding the guaranteed portion) may 
file an estimated Report of Loss with respect to the difference.
    (iii) The transferor, including any guarantor, may be released from 
liability only with prior Agency written concurrence and only when the 
value of the collateral being transferred is at least equal to the 
amount of the loan being assumed and is supported by a current 
appraisal and a current financial statement. The Agency will not pay 
for the appraisal. If the transfer is for less than the debt, the 
lender must demonstrate to the Agency that the transferor and 
guarantors have no reasonable debt-paying ability considering their 
assets and income in the foreseeable future.
    (3) Transfer fees. The Agency may charge the lender a nonrefundable 
transfer fee at the time of a transfer application. The Agency will set 
the amount of the transfer fee in an annual notice of funds 
availability.
    (g) Mergers. All borrower mergers require prior approval by the 
Agency and the lender. If a borrower merges without Agency approval, 
the lender must accelerate the loan unless subsequently agreed to in 
writing by the Agency.
    (h) Subordination of lien position. A subordination of the lender's 
lien position must be requested in writing by the lender and concurred 
with in writing by the Agency in advance of the subordination. Agency 
concurrence requires that:
    (1) The subordination be in the best financial interest of the 
Agency;
    (2) The lien to which the guaranteed loan is subordinated is for a 
fixed dollar limit;
    (3) Lien priorities remain for the portion of the loan that was not 
subordinated; and
    (4) The subordination of line of credit does not extend the term of 
the line of credit and in no event exceeds more than 3 years.
    (i) Repurchases from holder(s). The holder may make written demand 
on the lender or the Agency to repurchase the unpaid guaranteed portion 
of the loan in the case of borrower monetary default or failure of the 
lender to pay the holder its pro-rata share. When the lender and the 
Agency determine that repurchase is necessary to adequately service the 
loan, the holder must sell the guaranteed portion to the requesting 
entity.
    (1) Repurchases by lender. The lender must respond to the holder's 
demand within 30 days and will notify the Agency in writing of its 
decision, including notifying the Agency in writing of all repurchases 
it makes. When repurchased, the lender will accept an assignment 
without recourse from the holder upon repurchase. All repurchases must 
be for an amount equal to the holder's interest in the unpaid principal 
balance of the guaranteed portion and accrued interest less the 
lender's servicing fee and cover the principal and interest on the 
guaranteed loan accruing only up to 90 days after the date of the 
demand by the holder.
    (2) Repurchase by Lender for Servicing. If, in the opinion of the 
lender, repurchase of the guaranteed portion of the loan is necessary 
to adequately service the loan, the holder will sell the portion of the 
loan to the lender for an amount equal to the unpaid principal and 
interest on such portion less lender's servicing fee. The Loan Note 
Guarantee will not cover the note interest to the holder on the 
guaranteed loan accruing after 90 days from the date of the demand 
letter of the lender or the Agency to the holder requesting the holder 
to tender its guaranteed portion.
    (i) The lender will not repurchase from the holder for arbitrage 
purposes or other purposes to further its own financial gain.
    (ii) Any repurchase will only be made after the lender obtains 
Agency written approval.
    (iii) If the lender does not repurchase the portion from the 
holder, the Agency at its option may purchase such guaranteed portions 
for servicing purposes.

[[Page 76780]]

    (3) Repurchases by Agency. When the Agency repurchases the loan, 
the holder must submit a specific written demand to the Agency, along 
with appropriate documentation. The Agency will be subrogated to all 
rights of the holder and, subject to satisfactory documentation, will 
purchase the unpaid principal and interest of the guaranteed portion to 
date of repurchase less the lender's servicing fee within 30 days after 
receipt of the demand. The lender may not charge the Agency any fees.
    (i) The lender shall use a form approved by the Agency to send the 
guaranteed loan payments to the Agency on all loans repurchased by the 
Agency from holders.
    (ii) Any purchase by the Agency does not change, alter, or modify 
any of the lender's obligations to the Agency arising from the loan or 
guarantee and does not waive any of the Agency's rights against the 
lender, borrower, or guarantor.
    (iii) All repurchases must be for an amount equal to the holder's 
interest in the unpaid principal balance of the guaranteed portion and 
accrued interest less the lender's servicing fee and cover the 
principal and interest on the guaranteed loan accruing only up to 90 
days after the date of the demand by the holder.
    (j) Additional expenditures and loans. The lender may make 
additional expenditures or new loans to a borrower with an outstanding 
loan guaranteed under this part without obtaining prior written Agency 
approval unless the expenditure or loan will violate one or more of the 
loan covenants of the borrower's loan agreement.
    (k) Lender failure. In the event a lending institution fails or 
ceases servicing the loan, the Agency will provide instruction to the 
successor entity on a case-by-case basis. Such instructions may include 
that the Agency may determine to service the entire loan or the 
guaranteed portion of the loan. In the event no successor entity can be 
determined, the Agency reserves the right to enforce the provisions of 
the loan documents on behalf of the lender or to purchase the lender's 
interest in the loan.
    (l) Delinquent loans. The lender must service delinquent loans in 
accordance with the Lender's Agreement, its current servicing 
standards, and reasonable and prudent lending standards. If a borrower 
is delinquent more than 30 days, the lender must implement appropriate 
curative actions to resolve the problem. Any curative action that 
affects the return to the holder must receive the holder's concurrence. 
Any change in the repayment schedule must be limited to the remaining 
life of the collateral. Any loan performing in accordance with a 
curative action will no longer be delinquent.
    (m) Protective advances. The following conditions apply to 
protective advances associated with guaranteed loans under this part.
    (1) Protective advances are allowed only when they are necessary to 
preserve the value of the collateral and must be reasonable with 
respect to the outstanding loan amount and the value of the collateral 
being preserved.
    (2) Protective advances will not include attorneys' fees or 
advances in lieu of additional loans.
    (3) The lender must obtain written Agency approval for any 
protective advance that will singularly or cumulatively amount to more 
than $200,000 or 10% of the guaranteed loan, whichever is less.
    (4) Protective advances must constitute an indebtedness of the 
borrower to the lender and be secured by the security instruments.
    (5) Notwithstanding Sec.  5001.7(j), upon Agency approval, 
protective advances can be used to pay Federal tax liens and other 
Federal debt.
    (6) Protective advances and interest thereon at the note rate will 
be guaranteed at the same percentage of loss as provided in the Loan 
Note Guarantee.
    (7) The maximum loss to be paid by the Agency will be determined 
according to the procedures specified in Sec.  5001.17(p)(1) regardless 
of any protective advances made.
    (n) Liquidation. The lender may liquidate a loan when one or more 
incidents of default or third party actions occur that the borrower 
cannot or will not cure or eliminate within a reasonable period of 
time. The Agency reserves the right to unilaterally conclude that 
liquidation is necessary and require the lender to assign the security 
instruments to the Agency and the Agency will then liquidate the loan.
    (1) Liquidation by the lender. The lender must develop, in 
consultation with the Agency, a liquidation plan to determine the best 
course of action. The plan must include all aspects of liquidation, 
including, but not limited to reports to, the Agency, protection of 
collateral, loss payment, transmission of proceeds to the Agency, and 
future recovery.
    (i) Liquidation plan. The lender must submit its liquidation plan 
to the Agency for approval at least 30 days before implementing the 
plan. The Agency will approve or disapprove the plan within 30 days. 
Upon approval of the liquidation plan by the Agency, the lender may 
implement the plan. The Agency must be notified of any changes to or 
deviations from the plan.
    (ii) Appraisals. Liquidation appraisals must be a part of the 
liquidation planning process. They are not required for liquidation 
plan approval, provided they are obtained prior to the completion of 
the liquidation. If the outstanding principal loan balance including 
accrued interest is more than $200,000, the lender will obtain an 
independent appraisal report on all collateral securing the loan, which 
will reflect the current market value and potential liquidation value.
    (iii) Appraisal costs. Any independent appraiser's fee will be 
shared equally by the Agency and the lender. If an environmental site 
assessment in accordance with the appropriate ASTM Real Estate 
Assessment and Management environmental standards of the property is 
necessary in connection with liquidation, the cost will be shared 
equally between the Agency and the lender.
    (iv) Rent. Any net rental or other income that has been received by 
the lender from the collateral will be applied on the guaranteed loan 
debt.
    (2) Compromise settlement and release of personal guarantors. A 
compromise settlement may be considered at any time. Before a guarantor 
is released from liability, the Agency must concur with the lender. 
Upon agreement, the lender may proceed to effect a compromise 
settlement.
    (o) Litigation. In all litigation proceedings involving the 
borrower, the lender is responsible for protecting the rights of the 
lender or the Agency with respect to the loan, and keeping the Agency 
adequately and regularly informed, in writing, of all aspects of the 
proceedings. If the Agency determines that the lender is not adequately 
protecting the rights of the lender or the Agency with respect to the 
loan, the Agency reserves the right to take any legal action the Agency 
determines necessary to protect the rights of the lender, on behalf of 
the lender, or the Agency with respect to the loan. If the Agency 
exercises this right, the lender must cooperate with the Agency. Any 
cost to the Agency associated with such action will be assessed against 
the lender.
    (p) Loss calculations and payment. Estimated losses are calculated 
from principal and accrued interest. From this amount deduct prior 
liens, net value of collateral, and other funds. Final losses include 
principal,

[[Page 76781]]

protective advances, and accrued interest minus any estimated loss 
paid.
    (1) The maximum loss allowed is the lower of:
    (i) Any loss sustained by the lender on the guaranteed portion 
including:
    (A) Principal and interest indebtedness as evidenced by said notes 
or by assumption agreements, and
    (B) Principal and interest indebtedness on secured protective 
advances for protection and preservation of collateral made with the 
Agency's authorization, including but not limited to, advances for 
taxes, annual assessments, any ground rents, and hazard or flood 
insurance premiums affecting the collateral, or
    (ii) The guaranteed principal advanced to or assumed by the 
borrower under said notes or assumption agreements and any interest due 
thereon.
    (2) Accrued interest will be handled as specified in paragraphs 
(p)(2)(i) through (iv) of this section.
    (i) If the Agency conducts the liquidation of the loan, loss 
occasioned to the lender by accruing interest after the date the Agency 
accepts responsibility for liquidation will not be covered by the Loan 
Note Guarantee.
    (ii) If the lender conducts the liquidation of the loan, accruing 
interest shall be covered by the Loan Note Guarantee to 30 days after 
liquidation of collateral when the lender conducts the liquidation 
expeditiously in accordance with the liquidation plan approved by the 
Agency.
    (iii) Under no circumstances will the Agency pay more than 90 days 
of additional accrued interest once the liquidation plan is approved.
    (iv) Upon payment of an estimated loss to the lender, interest 
accrual on the defaulted loan will be discontinued.
    (3) During the course of any reorganization plan, the lender will 
request and revise estimated loss payments using Agency-approved forms. 
The estimated loss claim, as well as any revisions to this claim, will 
be accompanied by documentation to support the claim.
    (4) In a chapter 9 or chapter 11 reorganization, the lender must 
obtain an independent appraisal of the collateral if so directed by the 
Agency. The Agency and the lender will share the appraisal fee equally.
    (5) Final settlement of liquidation will be made with the lender 
after the collateral is liquidated (unless otherwise designated as a 
future recovery) or after settlement and compromise of all parties has 
been completed. The Agency retains the right to recover losses paid 
under the guarantee from any liable party.
    (i) If the lender takes title to collateral, any loss will be based 
on the collateral value at the time the collateral is liquidated.
    (ii) When the lender is conducting the liquidation and owns any of 
the guaranteed portion of the loan, the lender must submit an estimated 
loss claim when liquidation is expected to exceed 90 days.
    (iii) Within 30 days after liquidation of all collateral, except 
for certain unsecured personal, partnership, or corporate guarantees as 
provided for in this section, the lender must prepare a final report of 
loss and submit it to the Agency. The Agency will not guarantee 
interest beyond this 30-day period other than for the period of time it 
takes the Agency to process the loss claim. Before Agency approval of 
any final loss report, the lender must account for all funds, 
disposition of the collateral, and costs incurred, and must provide any 
other information necessary for successful completion of the 
liquidation.
    (iv) After a final loss has been paid by the Agency, any future 
funds recovered by the lender will be pro-rated between the Agency and 
the lender based on the original percentage of guarantee even if the 
Loan Note Guarantee has been terminated.
    (v) In a bankruptcy, the lender will submit an estimated loss claim 
based on the final orders of the bankruptcy court's direction. The 
Agency will pay the lender the estimated final loss based on these 
directions.
    (6) In response to a loss claim, the Agency may request and the 
lender must provide the Agency with a copy of the applicable loan 
origination and servicing policies and procedures in place for the 
loan.
    (7) When the Agency finds the final report of loss to be proper in 
all respects, it will approve the final loss. If the loss is less than 
the estimated loss payment, the lender will reimburse the Agency for 
the overpayment plus interest at the note rate from the date of the 
estimated loss payment.


Sec. Sec.  5001.18-5001.24  [Reserved]

Basic Borrower Provisions


Sec.  5001.25  Borrower responsibilities.

    (a) Federal, State, and local regulations. Borrowers must comply 
with all Federal, State, and local laws and rules that are in existence 
and that affect the project including, but not limited to:
    (1) Land use zoning;
    (2) Health, safety, and sanitation standards as well as design and 
installation standards; and
    (3) Protection of the environment and consumer affairs.
    (b) Permits, agreements, and licenses. Borrowers must obtain all 
permits, agreements, and licenses that are applicable to the project.
    (c) Insurance. The borrower is responsible for maintaining all 
hazard, flood, liability, worker compensation, and personal life 
insurance, when required, on the project.
    (d) Access to borrower's records. Upon request by the Agency, the 
borrower will permit representatives of the Agency (or other agencies 
of the U.S. Department of Agriculture authorized by that Department or 
the U.S. Government) to inspect and make copies of any of the records 
of the borrower pertaining to any Agency guaranteed loan. Such 
inspection and copying may be made during regular office hours of the 
borrower or at any other time agreed upon between the borrower and the 
Agency.


Sec. Sec.  5001.26-5001.29  [Reserved]

Basic Guarantee and Loan Provisions


Sec.  5001.30  General.

    (a) Underwriting. All loans guaranteed by the Agency must be 
underwritten in accordance with the credit evaluation requirements 
specified in Sec.  5001.16(b).
    (b) Conditions of guarantee. A loan guarantee under this part will 
be evidenced by a Loan Note Guarantee issued by the Agency. Each lender 
will execute a Lender's Agreement.
    (1) The entire loan will be secured by the same security with equal 
lien priority for the guaranteed and unguaranteed portions of the loan. 
The unguaranteed portion of the loan will neither be paid first nor 
given any preference or priority over the guaranteed portion.
    (2) The lender will remain mortgagee or secured party of record 
notwithstanding the fact that another party may hold a portion of the 
loan.
    (3) The holder of a guaranteed portion shall have all rights of 
payment, as defined in the Loan Note Guarantee to the extent of the 
portion purchased. The lender will remain bound by all obligations 
under the Loan Note Guarantee, Lender's Agreement, and Agency program 
regulations.
    (4) The lender will receive all payments of principal and interest 
on the entire loan and will promptly remit to each holder a pro-rata 
share, less any lender servicing fee.
    (5) No loan guaranteed by the Agency under this part will be 
conditioned on

[[Page 76782]]

any requirement that the borrower accept or receive electric service 
from any particular utility, supplier, or cooperative.
    (c) Full faith and credit. A guarantee under this part constitutes 
an obligation supported by the full faith and credit of the United 
States and is not contestable except for fraud or misrepresentation by 
the lender or holder, as appropriate, when the lender or holder has 
actual knowledge, participates in, or condones such fraud or 
misrepresentation.
    (1) A note that provides for the payment of interest on interest 
will not be guaranteed. Any claim against a Loan Note Guarantee or 
Assignment Guarantee Agreement that is attached to, or relating to, a 
note that provides for payment of interest on interest will be reduced 
to remove the interest on interest.
    (2) The guarantee will not be enforceable by the lender to the 
extent any loss is occasioned by the violation of usury laws, negligent 
loan origination or servicing, or failure to obtain the required 
security regardless of the time at which the Agency acquires knowledge 
of the foregoing. Any losses occasioned by the lender will not be 
enforceable to the extent that loan funds are used for purposes other 
than those specifically approved by the Agency in its Conditional 
Commitment.
    (3) When in the hands of a holder, the Loan Note Guarantee or 
Assignment Guarantee Agreement shall not cover interest accruing 90 
days after the holder has demanded repurchase by the lender. When in 
the hands of a holder, the Loan Note Guarantee or Assignment Guarantee 
Agreement shall not cover interest accruing 90 days after the lender or 
Agency has requested the holder to surrender the evidence of debt for 
repurchase.
    (4) The Agency will guarantee payment as follows:
    (i) To any holder, 100% of any loss sustained by the holder on the 
guaranteed portion of the loan and on interest due on such portion.
    (ii) To the lender, the lesser of:
    (A) Any loss sustained by the lender on the guaranteed portion, 
including principal and interest evidenced by the notes or assumption 
agreements and secured advances for protection and preservation of 
collateral made with the Agency's authorization; or
    (B) The guaranteed principal advanced to or assumed by the borrower 
and any interest due thereon.
    (d) Soundness of guarantee. All loans guaranteed under this part 
must be financially sound and feasible, with reasonable assurance of 
repayment.
    (e) Rights and liabilities. When a guaranteed portion of a loan is 
sold to a holder, the holder shall succeed to all payments of the 
lender under the Loan Note Guarantee to the extent of the portion 
purchased. A guarantee and right to require purchase will be directly 
enforceable by a holder notwithstanding any fraud or misrepresentation 
by the lender or any unenforceability of the guarantee by the lender, 
except for fraud or misrepresentation of which the holder had actual 
knowledge at the time it became the holder or in which the holder 
participates or condones. The lender shall not represent a Conditional 
Commitment as a guarantee. The Agency reserves the right to collect 
from the lender any payments made to the holder that would not have 
been payable to the lender had they been the holder.
    (f) Reduction of loss claims payable. Negligent loan origination or 
servicing will result in reduction of loss claims payable under the 
guarantee to the lender if any losses have occurred as the result of 
such negligence. The extent of the reduction, which could be a total 
reduction, of the loss claims payable, will depend on the extent of the 
losses occasioned as the result of the negligent loan origination and 
servicing.
    (g) Write-downs. Debt write-downs for an existing borrower where 
the same principals retain control of and decision-making authority for 
the business are prohibited.


Sec.  5001.31  Guaranteed loan requirements.

    (a) Interest rates. Interest rates may be fixed or variable or a 
combination of both, as long as they are legal. Variable interest rates 
must be tied to an acceptable published index and the lender must 
incorporate the provision for adjustment of payment installments into 
the Note.
    (1) Negotiated rates. Interest rates, interest rate caps, and 
incremental adjustment limitations will be negotiated between the 
lender and the borrower and will be subject to concurrence by the 
Agency.
    (2) Different rates on guaranteed and unguaranteed portion of the 
loan. If the lender and borrower agree, the interest rate on the 
guaranteed portion of a loan may differ from the rate on the 
unguaranteed portion provided:
    (i) The rate on the unguaranteed portion is equal to or below the 
market rate and does not exceed that currently being charged on loans 
for similar purposes to borrowers under similar circumstances; and
    (ii) The rate on the guaranteed portion does not exceed the rate on 
the unguaranteed portion unless the rate on the guaranteed portion is 
fixed and the unguaranteed portion is variable.
    (b) Interest rate changes.
    (1) General. Any change in the interest rate between issuance of 
the Conditional Commitment and issuance of the Loan Note Guarantee:
    (i) Must be approved in writing by the Agency, unless the only 
change is to the base rate of a variable interest rate;
    (ii) Must be shown as an amendment to the Conditional Commitment; 
and
    (iii) Are subject to the restrictions specified in paragraphs 
(b)(2) and (b)(3) of this section.
    (2) Reductions. The borrower, lender, and holder (if any) may 
collectively effect a permanent or temporary reduction in the interest 
rate on the guaranteed loan at any time during the life of the loan by 
their written agreement, subject to the conditions specified in 
paragraphs (b)(1)(i) through (iii) of this section. The lender must 
keep sufficient records to allow the Agency to calculate any loss at 
the reduced interest rate. The lender must notify the Agency of all 
permanent interest rate reductions, as specified in Sec.  
5001.4(b)(3)(ii).
    (i) After a permanent reduction, the Loan Note Guarantee will only 
cover losses of interest at the reduced interest rate.
    (ii) In a final loss settlement when qualifying rate changes are 
made with the required written agreements and notification, the 
interest will be calculated for the periods the given rates were in 
effect. The lender must maintain records that adequately document the 
accrued interest claimed.
    (iii) The lender is responsible for the legal documentation of 
interest-rate changes by an endorsement or any other legally effective 
amendment to the promissory note; however, no new notes may be issued. 
Copies of all legal documents must be provided to the Agency.
    (3) Increases. Increases in interest rates are not permitted beyond 
what is provided in the loan documents. Increases from a variable 
interest rate to a higher interest rate that is a fixed rate are 
allowed, subject to concurrence by the Agency.
    (c) Term length. The loan term will be based on the use of 
proceeds, the useful economic life of the assets being financed, and 
the borrower's repayment ability. In no event may the term exceed 40 
years.
    (d) Loan schedule and repayment. Repayment will be structured in 
accordance with this section and the Loan Agreement, and will be due 
and payable in accordance with the Note. Only loans that require a 
periodic

[[Page 76783]]

payment schedule that will retire the debt over the term of the loan 
without a balloon payment will be guaranteed. Lenders must ensure that 
the principal balance of a guaranteed loan is properly amortized within 
the prescribed loan maturity.
    (e) Maximum loan amounts. The maximum amount that may be guaranteed 
will be determined on a program-by-program basis and will be published 
each year in the Federal Register.
    (f) Maximum percent of guarantee. The maximum guarantee is 
specified in subpart B of this part for each guaranteed loan program 
covered by this part.
    (g) Fees. Each year, the Agency will establish, and publish in a 
Federal Register notice, the guarantee fee and renewal fee for each 
guaranteed loan program. A guarantee fee and a renewal fee will be 
assessed on each loan, as specified in the Federal Register notice. 
Both the guarantee fee and the renewal fee are nonrefundable.
    (1) Guarantee fee. The guarantee fee will be paid to the Agency by 
the lender at the time the lender requests the Loan Note Guarantee. The 
fee may be passed on to the borrower.
    (2) Renewal fee. As applicable, the renewal fee is assessed 
annually, is based on a fixed fee rate established at the time the loan 
is obligated, and will be calculated on the unpaid guaranteed principal 
balance as of close of business on December 31 of each year. The fee 
will be billed to the lender and may be passed on to the borrower.
    (h) Lender fees. The lender may levy reasonable, routine, and 
customary charges and fees, including late payment fees, for the 
guaranteed loan provided they are similar to those charged other 
borrowers for the same type of loan for which a non-guaranteed borrower 
would be assessed. Default charges, late payment charges, and 
additional interest expenses will not be covered by the Loan Note 
Guarantee. Such charges may not be added to the principal and interest 
due under any guaranteed note.


Sec.  5001.32  Conditional commitment.

    Upon approval of a loan guarantee application, the Agency will 
issue a Conditional Commitment to the lender containing conditions 
under which the Loan Note Guarantee will be issued.
    (a) The lender shall certify in the Conditional Commitment that:
    (1) The lender will monitor construction in accordance with 
approved plans and specifications, and
    (2) Project funds will be used only for Agency-approved project 
costs.
    (b) The lender may propose alternate conditions for Agency 
consideration.
    (c) The lender must complete and sign the Acceptance of Conditions 
and return a copy to the Agency.


Sec.  5001.33  Conditions precedent to issuance of loan note guarantee.

    Each of the conditions specified in paragraphs (a)(1) through (17) 
of this section must be met prior to the Agency's issuance of a Loan 
Note Guarantee under Sec.  5001.34.
    (a) The lender must certify in writing to each of the following 
conditions.
    (1) No major changes have been made in the lender's loan conditions 
and requirements since the issuance of the Conditional Commitment, 
unless such changes have been approved by the Agency in writing.
    (2) All planned property acquisition has been or will be completed, 
all development has been or will be substantially completed in 
accordance with plans and specifications, conforms with applicable 
Federal, state, and local codes, and costs have not exceeded the amount 
approved by the lender and the Agency.
    (3) Required hazard, flood, liability, worker compensation, and 
personal life insurance, when required, are in effect.
    (4) All truth-in-lending and equal credit opportunity requirements 
have been met.
    (5) The loan has been properly closed, and the required security 
instruments have been obtained or will be obtained on any acquired 
property that cannot be covered initially under State law.
    (6) The borrower has marketable title to the collateral then owned 
by the borrower, subject to the instrument securing the loan to be 
guaranteed and to any other exceptions approved in writing by the 
Agency.
    (7) When required, the entire amount of the loan for working 
capital has been disbursed except in cases where the Agency has 
approved disbursement over an extended period of time. In line of 
credit cases, if any advances have occurred, advances have been 
disbursed for purposes and in amounts consistent with the Conditional 
Commitment and line of credit agreements.
    (8) When required, personal, partnership, or corporate guarantees 
have been obtained.
    (9) All requirements of the Conditional Commitment have been met.
    (10) Lien priorities are consistent with the requirements of the 
Conditional Commitment. No claims or liens of laborers, subcontractors, 
suppliers of machinery and equipment, or other parties have been or 
will be filed against the collateral and no suits are pending or 
threatened that would adversely affect the collateral when the security 
instruments are filed.
    (11) The loan proceeds have been or will be disbursed for purposes 
and in amounts consistent with the Conditional Commitment and the 
Application for Loan Guarantee. A copy of the detailed loan settlement 
of the lender must be attached to support this certification. 
Appropriate lender controls were utilized to ensure that all funds were 
properly disbursed, including funds for working capital.
    (12) There has been no material change in the borrower's financial 
condition and no other adverse material change in the borrower during 
the period of time from the Agency's issuance of the Conditional 
Commitment to issuance of the Loan Note Guarantee regardless of the 
cause or causes of the change and whether or not the change or causes 
of the change were within the lender's or borrower's control. The 
lender must address any assumptions or reservations in the requirement 
and must address all material changes of the borrower, any parent, 
affiliate, or subsidiary of the borrower, and guarantors.
    (13) None of the lender's officers, directors, stockholders, or 
other owners (except stockholders in an institution that has normal 
stock share requirements for participation) has a substantial financial 
interest in the borrower and neither the borrower nor its officers, 
directors, stockholders, or other owners has a substantial financial 
interest in the lender. If the borrower is a member of the board of 
directors or an officer of a Farm Credit System institution that is the 
lender, the lender will certify that a Farm Credit System institution 
on the next highest level will independently process the loan request 
and act as the lender's agent in servicing the account.
    (14) The Loan Agreement includes all measures identified in the 
Agency's environmental impact analysis for this proposal (measures with 
which the borrower must comply) for the purpose of avoiding or reducing 
adverse environmental impacts of the proposal's construction or 
operation.
    (15) For loans exceeding $150,000, the lender has certified its 
compliance with the Anti-Lobby Act (18 U.S.C. 1913). Also, if any funds 
have been, or will be, paid to any person for influencing or attempting 
to influence an officer or employee of any agency, a Member of 
Congress, an officer or employee of Congress, or an employee of a 
Member of Congress in connection with this commitment providing for the 
United

[[Page 76784]]

States to guarantee a loan, the lender shall completely disclose such 
lobbying activities in accordance with 31 U.S.C. 1352.
    (16) Where applicable, the lender must certify that the borrower 
has obtained:
    (i) A legal opinion relative to the title to rights-of-way and 
easements. Lenders are responsible for ensuring that borrowers have 
obtained valid, continuous, and adequate rights-of-way and easements 
needed for the construction, operation and maintenance of a facility.
    (ii) A title opinion or title insurance showing ownership of the 
land and all mortgages or other lien defects, restriction or 
encumbrances, if any. It is the responsibility of the lender to ensure 
that the borrower has obtained and recorded such releases, consents, or 
subordinations to such property rights from holders of outstanding 
liens or other instruments as may be necessary for the construction, 
operation and maintenance of the facility and to provide the required 
security. For example, when a site is for major structures for utility-
type facilities (such as a gas distribution system) and the lender and 
borrower are able to obtain only a right-of-way or easement on such 
site rather than a fee simple title, such a title opinion must be 
requested.
    (17) The minimum financial criteria for a program for which a loan 
application has been submitted, including those financial criteria 
contained in the Conditional Commitment, have been maintained through 
the issuance of the Loan Note Guarantee. Failure to maintain these 
financial criteria shall result in an ineligible application.
    (b) If the lender is unable to provide any of the certifications in 
paragraphs (a)(1) through (17) of this section, the lender must provide 
an explanation satisfactory to the Agency as to why the lender is 
unable to provide the certification.


Sec.  5001.34  Issuance of the guarantee.

    The Agency, at its sole discretion, will determine if the 
conditions within the Conditional Commitment have been met. The Agency, 
at its sole discretion, will determine whether or not to issue the 
guarantee.
    (a) Loan agreement. The lender must submit to the Agency a copy of 
the loan agreement between the lender and the borrower prior to loan 
closing.
    (b) Requesting guarantee. The lender must provide the lender's 
certification and the guarantee fee at the time it requests the Loan 
Note Guarantee.
    (c) Issuance. Upon the lender's compliance with requirements of the 
Conditional Commitment and certification in accordance with Sec.  
5001.33(a), the Agency will issue the Loan Note Guarantee.
    (d) Refusal to execute Loan Note Guarantee. If the Agency 
determines that it cannot execute the Loan Note Guarantee, the Agency 
will promptly inform the lender of the reasons and give the lender a 
reasonable period within which to satisfy the objections. If the lender 
satisfies the objections within the time allowed, the guarantee will be 
issued.
    (e) Replacement of Loan Note Guarantee or Assignment Guarantee 
Agreement. If the Loan Note Guarantee or Assignment Guarantee Agreement 
has been lost, stolen, destroyed, mutilated, or defaced, the Agency may 
issue a replacement to the lender or holder upon receipt from the 
lender of a notarized certificate of loss and an indemnity bond 
acceptable to the Agency. If the holder is the United States, a Federal 
Reserve Bank, a Federal Government corporation, a State or Territory, 
or the District of Columbia, an indemnity bond is not required.


Sec.  5001.35  Alterations of loan instruments.

    Under no circumstances shall the lender alter or approve any 
alterations of the Loan Note Guarantee or any other loan instrument 
without the prior written approval of the Agency.


Sec.  5001.36  Reorganizations.

    (a) Change in borrower prior to closing. Any change in borrower 
ownership or organization prior to the issuance of the Loan Note 
Guarantee must meet program eligibility requirements and be approved by 
the Agency prior to the issuance of the Conditional Commitment. Once 
the Conditional Commitment is issued, no substitution of borrower(s) or 
change in the form of legal entity will be approved, unless Agency 
approval, in writing, is obtained.
    (b) Transfer of lender prior to issuance of the Loan Note 
Guarantee. Prior to issuance of a Loan Note Guarantee, the Agency may 
approve the transfer of an outstanding Conditional Commitment to 
another lender, provided no material changes have occurred in the 
borrower, project, or loan agreement.
    (1) The present lender must submit the requested transfer in 
writing to the Agency and the Agency must approve the transfer.
    (2) The other lender must be approved under this part.
    (3) The other lender must execute a new application for guarantee 
in conformance with this part. If the transfer is from a preferred 
lender to an approved lender, the approved lender must submit an 
application in accordance with the requirements specified in Sec.  
5001.12(a).
    (c) Substitution of lender after issuance of the Loan Note 
Guarantee. After the issuance of a Loan Note Guarantee, the lender 
shall not be substituted without the prior written approval of the 
Agency. A substitution of the lender must be requested in writing by 
the borrower, the proposed substitute lender, and the original lender 
if still in existence. The Agency may approve the substitution of a 
lender if the new lender is Rural Development approved; agrees in 
writing to acquire title to any unguaranteed portion of the loan held 
by the original lender; and assumes all original loan requirements and 
lender responsibilities. The Agency will not pay any loss or share in 
any costs with a lender who is not in compliance with this section.


Sec.  5001.37  Sale or assignment of guaranteed loan.

    (a) General. The lender may sell part of the guaranteed portion of 
the loan, subject to the conditions specified in paragraphs (a)(1) 
through (5) of this section.
    (1) Any sale or assignment by the lender of the guaranteed portion 
of the loan must be accomplished in accordance with the conditions in 
the Lender's Agreement.
    (2) The lender may obtain participation in the loan under its 
normal operating procedures; however, the lender must retain a minimum 
of 5% of the total loan amount in its portfolio. The amount required to 
be retained must be of the unguaranteed portion of the loan and cannot 
be participated.
    (3) The lender must not sell or participate any amount of the 
guaranteed, or non-guaranteed, portion of the loan to the borrower or 
members of the borrower's immediate family, the borrower's officers, 
directors, stockholders, other owners, or a parent, subsidiary, or 
affiliate.
    (4) Disposition of the guaranteed portion of a loan may not be made 
prior to full disbursement, completion of construction, and acquisition 
of real estate and equipment without the prior written approval of the 
Agency.
    (5) If the lender desires to sell all or part of the guaranteed 
portion of the loan subsequent to loan closing, the loan must not be in 
monetary default.

[[Page 76785]]

    (b) Servicing fee. The lender cannot charge the Agency a servicing 
fee and no such fees are covered under the guarantee.
    (c) Distribution of proceeds. All loan payments and collateral 
proceeds received will be applied to the guaranteed and unguaranteed 
portions of the loan on a pro rata basis.


Sec.  5001.38  Termination of loan note guarantee.

    Each Loan Note Guarantee issued under this part will terminate 
automatically upon:
    (a) Full payment of the guaranteed loan; or
    (b) Full payment of any loss obligation or negotiated loss 
settlement except for future recovery provisions and payments made as a 
result of the Debt Collection Improvement Act of 1996. After final 
payment of claims to lenders and/or holders, the Agency will retain all 
funds received as the result of the Debt Collection Improvement Act of 
1996; or
    (c) Written request from the lender to the Agency that the 
guarantee will terminate 30 days after the date of the request, 
provided that the lender holds all of the guaranteed portion, and the 
original Loan Note Guarantee is returned to the Agency to be canceled.


Sec. Sec.  5001.39-5001.100  [Reserved]

Subpart B--Program-Specific Provisions


Sec.  5001.101  Community Facilities Program.

    (a) Project eligibility. To be eligible for a Community Facility 
guaranteed loan, the project must meet the criteria specified in 
paragraphs (a)(1) through (5) of this section and in Sec.  5001.6, 
except as provided in paragraph (a)(6) of this section.
    (1) Eligible projects. All loans guaranteed with community facility 
funding shall be for:
    (i) Essential community facilities;
    (ii) Community services or community-based social, recreational or 
cultural services;
    (iii) Transportation infrastructure and support;
    (iv) Hydroelectric generating facilities or supplemental and 
supporting structures for rural electrification only with advance 
written approval from the Agency;
    (v) Natural gas distribution systems;
    (vi) Acquisition of land and site preparation for industrial parks;
    (vii) Refinancing debts (excluding working capital debt, operating 
or other debt whose repayment is scheduled to take place in one year or 
less). Refinancing debts incurred by, or on behalf of, an eligible 
borrower is allowed when all of the following conditions exist:
    (A) The debts being refinanced are less than 50% of the total loan;
    (B) The debts were incurred for the facility or service being 
financed or any part thereof (such as interim financing, construction 
expenses, etc.); and
    (C) Arrangements cannot be made with the creditors to extend or 
modify the terms of the debts so that a sound basis will exist for 
making a loan; or
    (viii) Notwithstanding Sec.  5001.7(e), a leasehold interest is 
eligible for funding as determined by the Agency. At a minimum,
    (A) The length of lease must be greater than or equal to loan term;
    (B) There are no reverter clauses in the lease; and
    (C) There are no restrictive clauses that would impair the use or 
value of the property as security for the loan.
    (2) Facilities for public use. All facilities financed under the 
provisions of this section shall be for public purposes.
    (i) Facilities will be installed to serve any user within the 
service area who desires service and can be feasibly and legally 
served.
    (ii) The lender will determine that, when feasibly and legally 
possible, inequities within the proposed project's service area for the 
same type service proposed (e.g., gas distribution systems) will be 
remedied by the owner on, or before, completion of the project. 
Inequities are defined as unjustified variations in availability, 
adequacy, or quality of service. User rate schedules for portions of 
existing systems or facilities that were developed under different 
financing, rates, terms, or conditions do not necessarily constitute 
inequities.
    (3) Leased space. A facility will remain eligible for Community 
Facility funding provided:
    (i) The facility has less than 25% of its floor space occupied by 
ineligible organizations or activities; and
    (ii) The ineligible organization and the ineligible commercial 
activity are related to and enhance the primary purpose for which the 
facility is being established by the borrower.
    (4) Facility location. Facilities must be located in rural areas, 
except as follows:
    (i) For utility services, such as natural gas or hydroelectric, 
serving both rural and non-rural areas, Agency funds may be used to 
finance only that portion serving rural areas, regardless of facility 
location.
    (ii) For telecommunication projects, the part of the facility 
located in a non-rural area must be necessary to provide the essential 
services to rural areas.
    (5) Serve rural area. The project must primarily serve a rural 
area.
    (6) Demonstration of community support. A project may demonstrate 
community support in lieu of the debt-to-tangible net worth ratio 
required under Sec.  5001.6(b)(2) and in lieu of the loan-to-value 
ratio required under Sec.  5001.6(b)(3).
    (i) Evidence of community support in the form of a certification of 
support for each project or facility from any affected local government 
body is required.
    (ii) With the exceptions of essential community facilities owned by 
a local public body or a Federally-recognized Indian tribe serving 
local residents or tribal members, a certificate of support must be 
obtained from each affected local government within the service area of 
the facility. The certificate of support must be signed by an 
authorized official of the local government.
    (iii) The certificate of support should include sufficient 
information to determine that a community facility will provide needed 
services to the community and will have no adverse impact on other 
community facilities providing similar services. The organization is 
required to provide sufficient information to affected local 
governments as may be needed to obtain the certificate of support.
    (b) Unauthorized projects and purposes. Loan funds may not be used 
to finance:
    (1) Facilities that are 25% or more for the purpose of housing 
Federal or State agencies;
    (2) Community antenna television services or facilities;
    (3) Telephone systems;
    (4) Facilities that are not modest in size, design, and cost;
    (5) Racetracks, water parks, and ski slopes.
    (c) Borrower eligibility. In addition to the requirements specified 
in subpart A of this part, an eligible borrower must also meet the 
following requirements where applicable:
    (1) Borrowers. An eligible borrower must be:
    (i) A public body such as a municipality, county, district, 
authority, or other political subdivision of a State located in a rural 
area;
    (ii) A not-for-profit entity such as an association, cooperative, 
or private corporation; or
    (iii) An Indian tribe on Federal and State reservations and other 
federally recognized Indian tribes.
    (2) Other eligible borrowers. The following organizations are also 
eligible borrowers under this subpart: The YMCA, YWCA, Girl Scouts, and 
Boy Scouts.

[[Page 76786]]

    (3) Community ties. A private not-for-profit essential community 
facility (other than utilities) must have significant ties with the 
local rural community. Such ties are necessary to ensure to the 
greatest extent possible that a facility under private control will 
carry out a public purpose and continue to primarily serve rural areas. 
Ties may be evidenced by items such as:
    (i) Association with, or controlled by, a local public body or 
bodies or broadly based ownership and controlled by members of the 
community.
    (ii) Substantial public funding through taxes, revenue bonds, or 
other local government sources, or substantial voluntary community 
funding such as would be obtained through a community-wide funding 
campaign.
    (4) Credit not available elsewhere. The Agency must determine that 
the borrower is unable to obtain the required credit without the loan 
guarantee from private, commercial, or cooperative sources at 
reasonable rates and terms for loans for similar purposes and periods 
of time.
    (d) Additional application documentation provisions. In addition to 
the application requirements specified in Sec.  5001.12, lenders shall 
submit the following as applicable:
    (1) Feasibility study. A feasibility study by a qualified 
consultant may be required by the Agency.
    (2) Organizational documents. A copy of the complete organizational 
documents of the borrower.
    (3) Board Members. A complete list of governing board members of 
the borrower.
    (4) Management agreement and other legal documents. A copy of the 
management agreement and other legal documents between the borrower and 
the proposed management company.
    (5) Preliminary architectural report. A preliminary architectural 
report conforming to customary professional standards. This report may 
be submitted to the Agency prior to the balance of the application 
material if a preliminary review by the Agency is desired.
    (e) Additional application processing requirements--appraisals. 
When a loan's collateral appraises at a level less than 100% of the 
loan amount, the Agency will consider community support in evaluating 
the application for guarantee.
    (f) Additional origination responsibilities--leasehold interest. 
Subject to approval by the Agency, a leasehold interest may be used as 
collateral for loans under this section provided the leasehold interest 
meets each of the conditions specified in paragraphs (a)(1)(viii)(A) 
through (C) of this section.
    (g) Additional servicing responsibilities--financial reports. 
Annual financial reports required shall conform to 7 CFR part 3052.
    (h) Additional guarantee- and loan-related requirements.
    (1) Funding limit. The principal amount of a Community Facility 
loan guaranteed under this section may not exceed $50 million.
    (2) Maximum percent of guarantee. The maximum loan guarantee issued 
to a Rural Development approved lender with Community Facilities 
funding is 90%.
    (3) Parity lien requirements. Whenever both a Community Facilities 
guaranteed loan and a Community Facilities direct loan are utilized to 
finance a single project, the Agency will require a parity lien, unless 
the lender cannot meet its regulatory requirements.


Sec.  5001.102  Water and Waste Disposal Facilities Program.

    (a) Project eligibility. To be eligible for a Water and Waste 
Disposal Facilities guaranteed loan, the project must meet the criteria 
specified in paragraphs (a)(1) through (3) of this section and in Sec.  
5001.6, except as provided in paragraph (a)(4) of this section.
    (1) Eligible projects and costs. All loans guaranteed with Water 
and Waste Disposal funding shall be for:
    (i) A water, waste disposal, solid waste disposal or storm water 
facility;
    (ii) Payment of other utility connection charges as provided in 
service contracts between utility systems; or
    (iii) Refinancing any loan. Except for the refinancing of Agency 
direct loans, refinancing of other loans will be limited to a minority 
portion of the guaranteed loan.
    (2) Facilities for public use. All facilities financed under the 
provisions of this section shall be for public purposes.
    (i) Facilities will be installed to serve any user within the 
service area who desires service and can be feasibly and legally 
served.
    (ii) The lender will determine that, when feasible and legally 
possible, inequities within the proposed project's service area for the 
same type service proposed will be remedied by the owner on, or before, 
completion of the project. Inequities are defined as unjustified 
variations in availability, adequacy, or quality of service. User rate 
schedules for portions of existing systems or facilities that were 
developed under different financing, rates, terms, or conditions do not 
necessarily constitute inequities.
    (3) Serve rural area. The project must primarily serve a rural 
area.
    (4) Demonstration of community support. A project may demonstrate 
community support in lieu of the debt-to-tangible net worth ratio 
required under Sec.  5001.6(b)(2) and in lieu of the loan-to-value 
ratio required under Sec.  5001.6(b)(3). Demonstration of community 
support shall be made as specified in Sec.  5001.101(a)(6)(i) through 
(iii).
    (b) Unauthorized projects and purposes. Loan funds may not be used 
to finance:
    (1) Facilities that are not modest in size, design, and cost;
    (2) The construction of any new combined storm and sanitary sewer 
facilities;
    (3) Any portion of the cost of a facility that does not serve a 
rural area;
    (4) That portion of project costs normally provided by a business 
or industrial user, such as wastewater pretreatment;
    (5) Rental for the use of equipment or machinery owned by the 
borrower;
    (6) Any project where an individual, or membership of another 
organization sponsors the creation of a nonprofit organization with the 
intent to control negotiations for employment or contracts that provide 
financial benefit to the sponsoring organization, affiliate 
organization, or a subsidiary organization of the sponsoring 
individuals or organization; or
    (7) For other purposes not directly related to operating and 
maintenance of the facility being installed or improved.
    (c) Borrower eligibility. To be eligible for a Water and Waste 
Disposal Facilities guaranteed loan, a borrower must meet the criteria 
specified in paragraphs (c)(1) and (2) of this section and in Sec.  
5001.8(a)(1) and (2).
    (1) Eligible entity. The borrower must be one of the following 
types of entities:
    (i) A public body such as a municipality, county, district, 
authority, or other political subdivision of a State located in a rural 
area;
    (ii) An organization operated on a not-for-profit basis, such as an 
association, cooperative, or private corporation. The organization must 
be an association controlled by a local public body or bodies, or have 
a broadly based ownership by or membership of people of the local 
community; or
    (iii) An Indian tribe on a Federal or State reservation or any 
other Federally-recognized Indian tribe.
    (2) Credit not available elsewhere. The Agency must determine that 
the borrower is unable to obtain the required credit without the loan 
guarantee from private, commercial, or

[[Page 76787]]

cooperative sources at reasonable rates and terms for loans for similar 
purposes and periods of time.
    (d) Additional lender approval requirements. The examination 
required under Sec.  5001.9(c)(1)(iv) may be conducted by the Agency or 
a qualified consultant.
    (e) Additional application documentation provisions. In addition to 
the application requirements specified in Sec.  5001.12, lenders shall 
submit the following as applicable:
    (1) Feasibility study. A feasibility study by a qualified 
consultant may be required by the Agency.
    (2) Preliminary engineering report. Two copies of the preliminary 
engineering report are to be submitted. Preliminary engineering reports 
must conform to customary professional standards. Preliminary 
engineering report guidelines for water, sanitary sewer, solid waste, 
and storm sewer are available from the Agency. The preliminary 
engineering report may be submitted to the Agency prior to the rest of 
the application material if a preliminary review by the Agency is 
desired.
    (3) Organizational documents. A copy of the complete organizational 
documents of the borrower.
    (4) Board Members. A complete list of governing board members of 
the borrower.
    (5) Management agreement and other legal documents. A copy of the 
management agreement and other legal documents between the borrower and 
the proposed management company.
    (6) Intergovernmental consultation. Intergovernmental consultation 
comments in accordance with 7 CFR part 3015, subpart V, of this title.
    (f) Additional lender servicing responsibilities--financial 
reports. Annual financial reports required shall conform to 7 CFR part 
3052.
    (g) Additional guarantee- and loan-related requirements--maximum 
percent of guarantee. The maximum loan guarantee issued to a Rural 
Development approved lender with Water and Waste Disposal Facility 
funding is 90%.


Sec.  5001.103  Business and Industry Program.

    (a) Definitions.
    Locally or regionally produced agricultural food product. Any 
agricultural food product that is raised, produced, and distributed in:
    (i) The locality or region in which the final product is marketed, 
so that the total distance that the product is transported is less than 
400 miles from the origin of the product; or
    (ii) The State in which the product is produced.
    Underserved community. A community (including an urban or rural 
community and an Indian tribal community) that has, as determined by 
the Secretary:
    (i) Limited access to affordable, healthy foods, including fresh 
fruits and vegetables, in grocery retail stores or farmer-to-consumer 
direct markets; and
    (ii) A high rate of hunger or food insecurity or a high poverty 
rate.
    (b) Project eligibility. To be eligible for a Business and Industry 
guaranteed loan, the project must meet the criteria specified in 
paragraphs (b)(1) through (b)(3) of this section, as applicable, and in 
Sec.  5001.6.
    (1) The project must be located in a rural area.
    (2) All loans guaranteed with Business and Industry funding shall 
be for:
    (i) Business and industrial acquisitions when the loan will keep 
the business from closing, prevent the loss of employment 
opportunities, or provide expanded job opportunities;
    (ii) Business conversion, enlargement, repair, modernization, or 
development;
    (iii) The purchase and development of land, easements, rights-of-
way, buildings, or facilities;
    (iv) The purchase of equipment, leasehold improvements, machinery, 
supplies, inventory, start up costs, working capital, pollution control 
and abatement, or feasibility studies;
    (v) Transportation services incidental to industrial development;
    (vi) Agricultural production, with advance written approval from 
the Agency, when it is not eligible for Farm Service Agency farmer 
program assistance and when it is part of an integrated business also 
involved in the processing of agricultural products;
    (vii) The purchase of membership, stocks, bonds, or debentures or, 
as allowed under paragraph (a)(3) of this section, cooperative stock;
    (viii) Commercial fishing, aquaculture, commercial nurseries, 
forestry, hydroponics, or the growing of mushrooms;
    (ix) Interest during the period before the first principal payment 
becomes due or when the facility becomes income producing, whichever is 
earlier;
    (x) Refinancing any loan when the Agency determines that the 
project is viable and equal or better rates or terms are offered. Same 
lender debt refinancing will be additionally required to be less than 
50% of the new loan amount unless the amount of the loan to be 
refinanced is already Federally guaranteed. Subordinated owner debt is 
not eligible;
    (xi) Providing takeout of interim financing when the lender submits 
a pre-application or a complete application in which the interim 
financing is proposed, prior to extending any portion of the interim 
loan;
    (xii) Fees and charges for professional services (except for 
packager and broker fees) and routine lender fees and the Agency 
guarantee fee;
    (xiii) Tourist and recreation facilities, including hotels, motels, 
and bed and breakfast establishments when the owner's living quarters 
is not included in the guaranteed loan;
    (xiv) Educational, training, or community facilities;
    (xv) Housing development sites with Agency-approved restrictions;
    (xvi) Community antenna television services or facilities;
    (xvii) Industries adjusting to terminated Federal agricultural 
programs or increased foreign competition;
    (xviii) Mixed use commercial and residential buildings on a pro-
rata basis (residential real estate use portion not eligible);
    (xix) Notwithstanding Sec.  5001.7(e), operating lines of credit 
that are part of an overall guaranteed loan financing package under 
this section and that are used for the payment of one or more of the 
following:
    (A) Annual operating/business expenses;
    (B) Debts advanced for the current operating cycle, excluding 
carry-over debt from previous operating cycles;
    (C) Scheduled, non-delinquent term borrower debt; or
    (D) Closing costs; or
    (xx) Leasehold improvements, provided the underlying lease meets 
the requirements specified in Sec.  5001.101(a)(1)(viii);
    (xxi) The purchase of preferred stock or similar equity issued by a 
cooperative organization or a fund that invests primarily in 
cooperative organizations, if the guarantee significantly benefits one 
or more entities eligible for assistance for the purposes described in 
paragraph (d) of this section; or
    (xxii) Establish and facilitate enterprises that process, 
distribute, aggregate, store, and market locally or regionally produced 
agricultural food products to support community development and farm 
and ranch income.
    (3) Purchase of cooperative stock. Loans may be made to individual 
farmers or ranchers for the purchase of cooperative stock. The entity 
to receive the proceeds from the stock sale must be a farmer or rancher 
cooperative

[[Page 76788]]

established for the purpose of processing agricultural commodities. 
Proceeds from the stock sale may be used to recapitalize an existing 
cooperative, to develop a new processing facility or product line, or 
to expand an existing production facility. The cooperative may contract 
for services to process agricultural commodities or otherwise process 
value-added agricultural products during the 5-year period beginning on 
the operation startup date of the cooperative in order to provide 
adequate time for the planning and construction of the processing 
facility of the cooperative.
    (c) Unauthorized projects and purposes.
    (1) Businesses housed in private homes, except when the pro-rata 
value of the owner's living quarters is not included in the guaranteed 
loan.
    (2) Any project that does not meet the requirements of paragraphs 
(d)(2), (d)(3), and (d)(4) in 7 U.S.C. 1932.
    (3) Interim financing.
    (4) Distribution or payment to an individual owner, partner, 
stockholder, or beneficiary of the borrower or the immediate family of 
such an individual when such individual will retain any portion of the 
ownership of the borrower, unless the Agency has determined that the 
distribution or payment is a part of the transfer of ownership within:
    (i) The immediate family; or
    (ii) An Employee owned Cooperative.
    (5) Loan guarantees to lending institutions, investment 
institutions, or insurance companies.
    (6) The guarantee of lease payments.
    (7) The guarantee of loans made by other Federal agencies.
    (8) Loans made with the proceeds of any obligation the interest on 
which is excludable from income under 26 U.S.C. 103 or a successor 
statute. Funds generated through the issuance of tax-exempt obligations 
may neither be used to purchase the guaranteed portion of any Agency 
guaranteed loan nor may an Agency guaranteed loan serve as collateral 
for a tax-exempt issue. The Agency may guarantee a loan for a project 
that involves tax-exempt financing only when the guaranteed loan funds 
are used to finance a part of the project that is separate and distinct 
from the part which is financed by the tax-exempt obligation, and the 
guaranteed loan has at least a parity security position with the tax-
exempt obligation.
    (9) Loan funds may not be used to support inherently religious 
activities.
    (d) Borrower eligibility. In addition to the criteria specified in 
Sec.  5001.8(a)(1) and (2), a borrower must meet both of the criteria 
specified in paragraphs (d)(1) and (2) of this section to be eligible 
for a Business and Industry guaranteed loan.
    (1) A borrower must be:
    (i) A cooperative organization, corporation, partnership, or other 
legal entity organized and operated on a profit or not-for-profit 
basis;
    (ii) An Indian tribe on a Federal or State reservation or other 
Federally recognized tribal group;
    (iii) A public body; or
    (iv) An individual.
    (v) A cooperative organization housed in an urban area is eligible 
provided certain rural benefits and requirements are met.
    (2) A borrower must be engaged in or proposing to engage in a 
business. Business may include manufacturing, wholesaling, retailing, 
providing services, or other activities that will:
    (i) Provide employment;
    (ii) Improve the economic or environmental climate;
    (iii) Promote the conservation, development, and use of water for 
aquaculture; or
    (iv) Reduce reliance on nonrenewable energy resources by 
encouraging the development and construction of solar energy systems 
and other renewable energy systems (including wind energy systems, 
geothermal energy systems, and anaerobic digesters for the purpose of 
energy generation).
    (e) Additional borrower requirements. The recipient of a loan 
guarantee under paragraph (a)(2)(xxii) of this section shall include in 
an appropriate agreement with retail and institutional facilities to 
which the recipient sells locally or regionally produced agricultural 
food products a requirement to inform consumers of the retail or 
institutional facilities that the consumers are purchasing or consuming 
locally or regionally produced agricultural food products.
    (f) Additional application process requirements.
    (1) Obligation of funds. If funds are insufficient to cover all 
applications pending approval, the Agency will allocate funds based on 
the date and time, based on Eastern time, a complete application is 
received, with those received first being funded first.
    (2) Priority. In making or guaranteeing a loan under paragraph 
(a)(2)(xxii) of this section, the Secretary shall give priority to 
projects that have components benefiting underserved communities.
    (g) Additional application documentation provisions.
    (1) Applications. In addition to the application requirements 
specified in Sec.  5001.12, lenders shall submit the following as 
applicable:
    (i) Feasibility study. A feasibility study by a qualified 
consultant may be required by the Agency for startup businesses or 
existing businesses when the project will significantly affect the 
borrower's operations. If a feasibility study of a cooperative is 
required, the feasibility study will determine the viability of the 
business and not the individual farm operators.
    (ii) Certification of Non-Relocation and Market Capacity. If the 
loan does not meet the requirements of paragraphs (d)(2), (d)(3), and 
(d)(4) in 7 U.S.C. 1932, a form approved by the Agency concerning non-
relocation and market capacity.
    (iii) Intergovernmental consultation comments in accordance with 7 
CFR part 3015, subpart V, of this title.
    (2) Simplified applications. For applications for loan guarantees 
of $400,000 or less, the lender may submit an application in 
conformance with Sec.  5001.12(b).
    (h) Additional Origination Responsibilities.
    (1) Financial statements. Consolidated financial statements shall 
be required for variable interest entities in accordance with the 
Financial Accounting Standards Board financial interpretation 46, 
Consolidation of Variable Interest Entities, and eliminating 
intercompany transactions.
    (2) Collateral.
    (i) Cooperative stock. At a minimum, for the purchase of 
cooperative stock, the lender must secure the loan with a lien on the 
stock acquired with loan funds, an assignment of any patronage refund, 
and the full and unconditional personal, partnership, or corporate 
guarantee of the borrower.
    (ii) Leasehold interest. Subject to approval by the Agency, a 
leasehold interest may be used as collateral for loans under this 
section provided the underlying lease meets the requirements specified 
in Sec.  5001.101(a)(1)(viii).
    (iii) Discounting collateral. When evaluating collateral for loans 
under this section, the lender shall comply with the requirements 
specified in paragraphs (h)(2)(iii)(A) through (E) of this section.
    (A) No value will be assigned to unsecured personal, partnership, 
or corporate guarantees.
    (B) A maximum of 80% of current market value will be given to real 
estate. Special purpose real estate should be assigned less value.
    (C) A maximum of 60% of book value to be assigned to acceptable 
accounts receivable; however, all accounts over 90 days past due, 
contra accounts,

[[Page 76789]]

affiliated accounts and other accounts deemed not to be collateral will 
be omitted. Calculations to determine the percentage to be applied in 
the analysis are to be based on the realizable value of the accounts 
receivable taken from a current aging of accounts receivable from the 
borrower's most recent financial statement.
    (D) A maximum of 60% of book value will be assigned to inventory.
    (E) Collateral value assigned to machinery and equipment, furniture 
and fixtures will be based on its marketability, mobility, useful life, 
and alternative uses, if any. Collateral value assigned to these types 
of security will not exceed 70%.
    (3) Payment and performance bond. A payment and performance bond 
sufficient to mitigate Agency risk if the project is never completed 
must be provided.
    (i) Additional servicing requirements--repurchase. Repurchased 
loans may be sold without recourse to third-party private investors.
    (j) Additional guarantee- and loan-related requirements.
    (1) Marginal/substandard loans. It is not intended that the 
guarantee authority will be used for marginal or substandard loans or 
for the relief of lenders having such loans.
    (2) Conditional Commitment. For the purchase of cooperative stock, 
the Conditional Commitment shall require the cooperative to provide the 
lender with all required Federal, State, and local permits and other 
clearances involving the environmental aspects for review and approval.
    (3) Lines of credit. Lines of credit are subject to the conditions 
identified in paragraphs (j)(3)(i) through (v) of this section.
    (i) The maximum term of a line of credit is 7 years, or limited to 
the term of the other guaranteed loans approved under this subpart, 
whichever is less.
    (ii) The total principal balance owed at any one time on line of 
credit advances may not exceed the line of credit ceiling. If a lender 
exceeds the credit ceiling, any loss payment will be reduced by the 
amount the credit ceiling was exceeded.
    (iii) As part of the lender's annual review of the borrower's 
operation, and before funds are re-advanced, the lender will verify to 
the satisfaction of the Agency that the borrower is in compliance with 
the provisions of the lender's line of credit agreement and term loan 
agreement, income and loan proceeds for the previous operating cycle 
have been properly accounted for, and the borrower's projected cash 
flow for the borrower's upcoming operating cycle, using reasonable 
assumptions, indicates a reasonable chance of repayment. The total 
amount advanced will not exceed the projected credit needs for that 
operating cycle as indicated in the borrower's projections, unless the 
projections are revised and continue to reflect feasibility.
    (iv) The lender must ensure that lines of credit remain adequately 
secured with any suitable collateral. At no time will advances be made 
when the outstanding principal balance exceeds the discounted value of 
the collateral securing the line of credit.
    (v) Lines of credit must be retained by the lender; they cannot be 
assigned or sold on the secondary market.
    (4) Issuance of Loan Note Guarantee.
    (i) Paragraph Sec.  5001.33(a)(2) notwithstanding, the Agency may, 
at its sole discretion, issue a Loan Note Guarantee prior to all 
planned property acquisitions having been completed and all development 
having been substantially completed in accordance with plans and 
specifications. In considering whether to issue a Loan Note Guarantee 
prior to construction being completed, the Agency will consider the 
added risk associated with issuing a Loan Note Guarantee under such 
conditions. When negotiating the percent of guarantee with the lender, 
the Agency will consider these added risks and the credit risks and the 
lender's experience in financing the type of project. Where the Agency 
determines it is warranted, the percent of guarantee will be reduced by 
a minimum of 10%.
    (ii) If, for the purchase of cooperative stock, the lender requests 
the issuance of the Loan Note Guarantee before the cooperative becomes 
operational, the lender must certify to the Agency that the cooperative 
has all of the required Federal, State, and local permits and other 
clearances involving the environmental aspects for review and approval.
    (5) Funding limits. At the time of loan approval, the full amount 
of outstanding principal and interest balance associated with Business 
and Industry loans, including the amount of the loan being approved, 
cannot exceed $25,000,000 for any one borrower, except that for a 
cooperative organization this limit shall be $40,000,000 for rural 
projects processing value added commodities or significantly benefits 
one or more entities eligible for assistance for the purposes described 
in paragraph (b) of this section.
    (i) The total amount of Business and Industry loans made to 
cooperative organizations and guaranteed for a fiscal year with 
principal amounts that are in excess of $25,000,000 may not exceed 10% 
of the Business and Industry loans guaranteed for the fiscal year.
    (ii) The principal amount of a Business and Industry loan made for 
the purchase of cooperative stock may not exceed $600,000.
    (6) Guarantee fee. The maximum guarantee fee that may be charged is 
2%. The guarantee fee may be reduced to 1% if the borrower is a high 
impact business and is located in an area of long term population 
decline and job deterioration as a result of persistent economic 
hardship, significant economic loss from a Presidentially-declared 
disaster, or a fundamental structural economic change. Each fiscal 
year, the Agency will establish a limit on the maximum portion of 
guarantee authority available for that fiscal year that may be used to 
guarantee loans with a guarantee fee of 1%. The limit will be announced 
by publishing a notice in the Federal Register. Once the limit has been 
reached, the guarantee fee for all additional loans obligated during 
the remainder of that fiscal year will be 2%.
    (7) Maximum percent of guarantee. The maximum loan guarantees 
issued to a Rural Development approved lender with Business and 
Industry funding is:
    (i) 80% if the guaranteed loan amount is $5 million or less;
    (ii) 70% if the guaranteed loan amount $10 million or less, but 
greater than $5 million; or
    (iii) 60% if the guaranteed loan amount is greater than $10 
million.


Sec.  5001.104  Rural Energy for America Program.

    (a) Project eligibility. To be eligible for a Rural Energy for 
America Program guaranteed loan, the project must meet the criteria 
specified in paragraphs (a)(1) through (a)(3) of this section and in 
Sec.  5001.6.
    (1) The project shall be for the purchase, installation, expansion 
and/or other energy-related improvement of a renewable energy system or 
to make energy efficiency improvements; and
    (2) The project shall be for technology that is--
    (i) Pre-commercial or commercially available, and
    (ii) Replicable.
    (3) The project must be located in a rural area.
    (4) The project may include the refinancing of any loan when the 
Agency determines that the project is viable and equal or better rates 
or terms are offered provided that the debt being refinanced will be 
less than 50% of the new loan amount.
    (b) Borrower eligibility. To be eligible for a Rural Energy for 
America Program

[[Page 76790]]

guaranteed loan, a borrower must be an agricultural producer or rural 
small business and must meet the criteria specified in Sec.  
5001.8(a)(1) and (2).
    (c) Additional application process requirements--obligation of 
funds. If funds are insufficient to cover all applications pending 
approval, the Agency will allocate funds based on the date and time, 
based on Eastern time, a complete application is received, with those 
received first being funded first.
    (d) Additional application documentation provisions. In addition to 
the application requirements specified in Sec.  5001.12, lenders shall 
submit the following as applicable:
    (1) Certifications. The lender must certify in the application that 
the project is able to demonstrate technical merit and that the 
borrower is an agricultural producer or rural small business.
    (2) Technical report. For renewable energy system projects with 
total eligible project costs of more than $200,000, a satisfactory 
technical report that demonstrates that the project is commercially 
viable and can be installed and perform as intended in a reliable, 
safe, cost-effective, and legally compliant manner must be provided to 
the Department of Energy (DOE) for review, unless otherwise stated in a 
Federal Register Notice To determine the overall technical merit of the 
renewable energy system, the lender must submit its proposal to the 
Agency for review.
    (3) Energy assessment/audit. For energy efficiency improvement 
projects, an energy assessment, with adequate and appropriate evidence 
of energy savings expected when the system is operated as designed, 
must be provided. For energy efficiency improvement projects with total 
eligible project costs greater than $50,000, an energy audit is 
required. The lender must submit energy assessments and energy audits 
to the Agency for review.
    (4) Feasibility study. A feasibility study by a qualified 
consultant is required for each renewable energy system project seeking 
a loan guarantee of greater than $200,000.
    (5) Intergovernmental consultation comments in accordance with 7 
CFR part 3015, subpart V, of this title.
    (e) Additional Origination Responsibilities.
    (1) Financial statements. Consolidated financial statements shall 
be required for variable interest entities in accordance with the 
Financial Accounting Standards Board financial interpretation 46, 
Consolidation of Variable Interest Entities, and eliminating 
intercompany transactions.
    (2) Discounting collateral. When evaluating collateral for loans 
under this section, the lender shall comply with the requirements 
specified in Sec.  5001.103(h)(2)(iii).
    (3) Payment and performance bond. A payment and performance bond 
sufficient to mitigate Agency risk if the project is never completed 
must be provided.
    (f) Additional servicing responsibilities--post-construction 
reporting requirements. Once the project has been constructed, the 
lender must provide to the Agency annual reports from the borrower on 
the performance characteristics and results of the projects.
    (1) Schedule. For renewable energy system projects, these reports 
are to be provided commencing in the first full calendar year after 
construction is completed and continuing for 3 full years. For energy 
efficiency improvement projects, these reports are to be provided 
commencing the first full calendar year following the year in which 
project construction was completed and continuing for 2 full years.
    (2) Contents. Reports for renewable energy system projects must 
contain, at a minimum, information on output and sales and/or energy 
savings. Reports for energy efficiency improvement projects must 
contain, at a minimum, information on energy savings. Additional 
information to be included in these reports will be negotiated between 
the Agency and the lender/borrower prior to the execution of the Loan 
Note Guarantee.
    (g) Additional guarantee- and loan-related requirements.
    (1) Issuance of Loan Note Guarantee. In addition to the 
requirements specified in Sec.  5001.34, for Rural Energy for America 
Program loans, the lender must certify that all planned property 
acquisitions and development have been performing at a steady state 
operating level in accordance with the technical requirements, plans, 
and specifications; the project conforms with applicable Federal, 
State, and local codes; and costs have not exceeded the amount approved 
by the lender and the Agency.
    (2) Funding considerations.
    (i) Maximum loan guarantee. At the time of loan approval, the full 
amount of outstanding principal and interest balance associated with 
Rural Energy for America Program loans, including the amount of the 
loan being approved, cannot exceed $25,000,000 for any one borrower.
    (ii) Loan guarantee amount. In determining the amount of a loan 
guarantee, the Agency will take into consideration the following seven 
criteria:
    (A) The type of renewable energy system to be purchased;
    (B) The estimated quantity of energy to be generated by the 
renewable energy system;
    (C) The expected environmental benefits of the renewable energy 
system;
    (D) The extent to which the renewable energy system will be 
replicable;
    (E) The amount of energy savings expected to be derived from the 
activity, as demonstrated by an Agency-approved energy audit;
    (F) the expected energy efficiency of the renewable energy system; 
and
    (G) The estimated length of time it would take for the energy 
savings generated by the activity to equal the cost of the activity.
    (3) Matching funds. The amount of a Rural Energy for America loan 
guarantee, including any grants and direct loans made under this 
program, that will be made available to an eligible project will not 
exceed 75% of total eligible project costs. Eligible project costs are 
only those costs associated with the items identified in paragraphs 
(g)(3)(i) through (xi) of this section, as long as the items are an 
integral and necessary part of the renewable energy system or energy 
efficiency improvement.
    (i) Post-application purchase and installation of equipment (new, 
refurbished, or remanufactured), except agricultural tillage equipment, 
used equipment, and vehicles.
    (ii) Post-application construction or improvements, except 
residential.
    (iii) Energy audits or assessments.
    (iv) Permit and license fees.
    (v) Professional service fees, except for application preparation, 
packager fees, and broker fees.
    (vi) Feasibility studies and technical reports.
    (vii) Business plans.
    (viii) Retrofitting.
    (ix) Construction of a new energy efficient facility only when the 
facility is used for the same purpose, is approximately the same size, 
and based on the energy audit will provide more energy savings than 
improving an existing facility. Only costs identified in the energy 
audit for energy efficiency improvements are allowed.
    (x) Working capital.
    (xi) Land acquisition.
    (4) Maximum percent of guarantee. The maximum loan guarantees 
issued to a Rural Development approved lender with Rural Energy for 
America Program funding is:
    (i) 85% if the guaranteed loan amount is $600,000 or less;

[[Page 76791]]

    (ii) 80% if the guaranteed loan amount $5 million or less, but 
greater than $600,000;
    (iii) 70% if the guaranteed loan amount is greater than $5 million 
but less than or equal to $10 million; or
    (iv) 60% if the guaranteed loan amount is greater than $10 million.


Sec. Sec.  5001.105-5001.199  [Reserved]


Sec.  5001.200  OMB control number.

    Pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 
35; see 5 CFR part 1320), the information collection provisions have 
been submitted to the Office of Management and Budget (OMB) for 
approval as a new collection and assigned OMB number 0570-0054.

    Dated: December 1, 2008.
Thomas C. Dorr,
Under Secretary for Rural Development.
[FR Doc. E8-29151 Filed 12-16-08; 8:45 am]
BILLING CODE 3410-15-P